The Marriage Bonus, Penalty, & Effect of Student Loan Interest Tax Deduction on Millennials

The Marriage Bonus, Penalty, & Effect of Student Loan Interest Tax Deduction on Millennials

Though tax season is officially behind us, we are never completely out of the IRS’s focus. What we do and the actions we take are tallied up, in particular, when these actions have tax-related consequences. In our society, we sometimes use taxes to bolster behavior that we are looking to support or taxes are used as a penalty for bad behavior that is considered counter to “American ideals.” Saying “I do” is one of the behaviors that taxes are looking to bolster and there has been a long set history of providing benefits to those couples that have decided to support “traditional” values and get married.  

The Marriage Bonus

This is known as the marriage bonus. If a couple gets married and files as married taxpayers, they not only combine their incomes and deductions, but the total tax levied against them is usually at a better rate than for those two people, not married, who filed as single taxpayers. Marriage bonuses are usually the result of a tax situation where the couple has a significant and disparate earning rate, where one person in the couple makes substantially more (or is the traditional breadwinner) and the other person is either making a minimal salary or not working at all. This creates a significant benefit to those couples living in what is considered a “traditional” lifestyle, with a breadwinner and a homemaker or stay-at-home parent.

The Marriage Penalty

There is, however, a marriage penalty, that can be levied against couples who have similar incomes and when combined push the couple into a higher tax bracket. The push toward the higher tax bracket can lead to a limitation on the benefits and tax breaks that could be afforded to the couple so as to not give an unfair and undue advantage to those couples that don’t need the government’s help to make ends meet. For these couples, even if they choose to file as “married filing separately,” they are still a loss in benefits and tax breaks for the couple.

The Student Loan Interest Tax Deduction Hitch: Only One Deduction Per Married Couple

One scenario that has been affecting Millennials, in particular, is the Student Loan Interest Tax Deduction, which for married millennials is serving as an unintended tax penalty and is having a significant effect on millennials’ decisions to get married. According to Forbes, there is a tax break associated with repaying your student loans, a situation that the majority of Millennials are in the middle of currently. The tax break provides a deduction up to $2,500 of interest from your overall income. The tax break, however, has several catches and is causing Millennials to rethink their future plans with their partners. With this tax break, the student loan tax deduction starts to phase out once you hit the range between $65,000 and $80,000 (as a single taxpayer); in other words, if you earn around $65,000, the student loan deduction amount starts to reduce at a percentage for each dollar that you earn after $65,000. Once you earn $80,000, the reduction is maxed out and you will not be able to claim a red cent.

For a married taxpayer, that phase out limit is higher (to apply to a double income): $130,000 to $160,000. This is great for a married taxpayer who has student loans. However, there is a catch: the deduction can only be claimed once by one of the spouses, not both. In other words, this deduction is only available to a couple where one spouse has loans to pay off, and the other does not. Filing as “married filing separately” does not allow you to skirt the deduction limitation; if the couple chooses this status, neither of the spouses can claim the deduction.

Experienced Family Law Attorneys in Mount Pleasant, Charleston Area

Tax penalties and breaks are just some of the financial considerations that a young couple should consider before deciding to get married. An experienced family law attorney will be able to provide you with a clear financial picture for you and your partner to prepare you both for the married life. Contact Klok Law Firm LLC today for a free and confidential consultation.  We are happy to help you today.