Well, it is official, Maeve, Phoebe, and Sophie are all in college. It is very quiet around the house these days. Jill and I have breakfast together, in peace. No yelling in the morning that Sophie has stolen Phoebe’s clothes, or Phoebe stealing Sophie’s headphones. While I do miss them, a lot, it is quite nice for Jill and I to move to the next step of parenting and marriage.
So, Saturday night at the Cutter household, historically, is typically movie night. With the girls away, Jill and I pretty much get these to ourselves these days. In fact, I love being able to immerse myself in movies that I like best – mostly the oldies. Jill gets her turns to choose what we watch, but last weekend it was up to me. I chose a few old Saturday Night Live episodes from the late 80’s and early 90’s – yes, thirty years later, these are still classics.
You may remember the Wayne’s World skits, with Wayne and Garth. In one of the skits I watched, Wayne says, “Garth, you know marriage is punishment for shoplifting in some countries!”
Of course, I chuckled at this. There’s no shortage of jokes about the “tragedies” of being married, but unfortunately this type of thing exists in real life. The “marriage” penalty is a real thing, financially. And it’s not just that you’re penalized if you meet and fall in love during your golden years. Get this, under current federal law, if you and your long-term spouse make it into your 60s you might actually be better off financially by divorcing.
While I am in no way suggesting that older couples should get divorced merely for this reason, it is important that you understand how our federal systems treat married couples financially so you can factor this into your retirement planning.
Let’s look at two key areas where a couple may be better off unmarried than married, starting with Social Security. In 1983, the Reagan Administration began taxing Social Security income, despite Franklin D. Roosevelt’s position that these benefits would never be taxed. (And don’t forget that our contributions to Social Security are made with after-tax dollars, so taxation on our benefits means we are being double taxed on our benefits).
One important motivating factor in introducing this change was to raise revenue as part of a much larger package of program changes designed to address the financial solvency of Social Security. Taxes here are higher for a married couple than an unmarried couple with the exact same finances. This is because Social Security taxes kick in at two thresholds, and in both cases, the threshold for a married couple is less than twice the threshold for an unmarried person – thus, the “marriage penalty”.
The first income threshold is $25,000 for a single person, and $32,000 for a couple. The second threshold is $34,000 for a single person, and $44,000 for a couple. That means two unmarried people living together today with incomes of $25,000 each will end up paying no Social Security taxes on their benefits. But a married couple with income of $50,000 blows through both thresholds and ends up paying income tax on 85% of their benefits.
Keep in mind, too, that the income thresholds at which you start paying Social Security taxes isn’t indexed for inflation. These limits were set in 1983 as taxes on “high earners” only.
Hmmm . . . even at the highest threshold of $50,000, that’s hardly a “high earner” today.
And adding to the pain are the limits on the deduction for state and local taxes — also known as SALT. It isn’t doubled, as logic might dictate. Instead, a $10,000 cap applies to both single filers and married filers.
Another area where the married couple suffers is when it comes to nursing-home care. The average nursing home cost for a private room is $108,405 a year per person₁. And while many people still think Medicare will pay for them to stay in a nursing home, that’s incorrect except in very narrow and limited circumstances. The only federal program that will pay for nursing-home costs is Medicaid, and it will only do so once you have spent nearly all your own assets down to around $2000 – and even then you typically have to share a room in the nursing home.
Folks, here’s where it gets interesting. When it comes to making sure you’ve spent nearly all of your own assets first, Medicaid will consider a married couple as a unit, but an unmarried couple as two separate people. So, let’s take Jill and me. Generally speaking, if I have to go into a nursing home, Medicaid will demand that we run through nearly all our money — mine AND Jill’s — before it kicks in to help cover the costs.
This means that some of Jill’s income could be required to pay for my nursing-home bill. However, if Jill and I were not married, none of her income would be subject to this mandatory contribution requirement.
To make matters worse, after I die, Medicaid can then come after Jill to help “repay” my prior nursing-home costs. They can even come after our estate after Jill dies – but not if we’re not married.
Now, as I said before, this alone is not enough for you to race to file those divorce papers. There are plenty of areas where marriage has financial and legal benefits regardless of age. But to take advantage of these to the fullest, you’ll want to make sure to consult with legal and financial advisors and implement some smart planning. And Jill – don’t worry, you’re stuck with me in Holy Matrimony to the very end!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.