Why Congress Wants You To Live In Sin ... Page 2

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Published by Eva Rosenberg, MBA, EA

Why Congress Wants You To Live In Sin
Page 2

Marilyn Monroe and Friends

On this, Marilyn Monroe's birthday, I'd like to reminisce about her antics in trying to find a millionaire husband. She, Lauren Bacall and Betty Grable schemed until they tricked themselves into finding the men of their dreams. Seemed like a good idea at the time. Today, with prenuptuals, his-and-hers lives, taxes, etc., there is a strong argument for co-habitating. These days, you are likely to get more money from palimony than alimony! And while you're together, you'll pay less tax if you share some of that wealth.

For or Against

In this last round of tax re-structuring, they eliminated one of my strongest arguments against marriage - that once-in- a-lifetime $125,000 exclusion from the sale of a home. It was one of the more inanely written tax laws I've seen. Now that it's gone, I can't use that in my comedy routine. But that's OK. Congress left me lots of other material.

Clearly, not everyone will benefit by getting divorced. Let's save time and I'll tell you who may as well stay married.

A) The one income couple, with income over $25,350, (family with one child - income over $25,750, two children - income over $29,290) no medical or work-related expenses, and not receiving social security.

Or

B) The two income couple who each earn approximately the same amount of income, but combined, earn less than $102,300, no medical or work-related expenses, and not receiving social security.

The folks in group A come out ahead by being married. To the folks in group B, it makes no difference either way.

Living Single

Being married under the present tax structure affects people of all ages at all income levels. I started to go through the details and the calculations, but after about five pages, I realized we just don't have room to show you all the computations. Aren't you relieved?

When I bring up the following topics, you'll want to say, "Why not just file as married, filing separately (MFS)?' Wouldn't that even out the computations?" Unfortunately, the MFS status has such penalties, it only makes things worse. In fact, in some instances, MFS removes certain benefits in the tax code entirely. (For our discussion, we are using 1998 tax rates.)

Sadly, though, there really are too many instances where it pays to 'live in sin'. By the time we get done, you'll wonder why you ever got married. (I married him for the medical benefits...)

Single is better if you're poor or old, too!

Earned Income Credit (EIC). The tax structure affects people at poverty level. This negative tax helps people, especially with children, whose household incomes are less than $29,290. Someone earning between $9,100 and $11,950, who has two children would get back $3,656 from the IRS! That's quite a windfall. For some families, that's the difference between eating and starving. When you have more than two children, there is no additional benefit.

To get the EIC a couple must file a joint return. Filing separately voids the credit completely. So, a couple with combined income of $20,000, or with a third child could double that EIC if they got divorced. They could each file as head of household with one or two children. That extra $3,000 or so could be very important. It's well worth it to be single.

(Warning: Some tax preparers actually prepare returns in this fashion even when they know the couple is married. The IRS is on the lookout for this practice.)

Moving up the income ladder. Miscellaneous deductions, most commonly consist of either business expenses or job-related education. When you use these deductions, you lose the first two percent of your adjusted gross income (AGI). This means, two percent of all your sources of income, including your spouse's.

Quite often, only one spouse has business expenses that amount to anything. But when you take into account the two percent AGI penalty and the standard deduction for filing jointly, none of the deductions are usable. For couples whose income is similar, splitting their income and filing as MFS has little effect on this penalty. Why? Because if one spouse itemizes, the other spouse must use itemized deductions, too. So, often, the second spouse simply loses the standard deduction and the net affect is less than $100 difference. Less than the cost to prepare two returns.

The solution? Get divorced. File as single and take the full benefit of the expenses, while your former spouse gets a higher standard deduction. You could save thousands of dollars this way.

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