Why do American dual-high-income couples get legally married?

Question

If each member of a couple makes a high income, they pay much more U.S. income tax if married.

So it makes sense for them to avoid legal marriage.

They can still do a religious ceremony or a commitment ceremony without notifying City Hall. They can exchange rings. If they want to tie their financial lives together, a lawyer can help them buy a house jointly, open a bank account together, give each other Powers of Attorney, etc.

So why do so many high-dual-income couples go through the bureaucratic side of marriage?

Answer 1

TL/DR:

• Basing your life on current tax law is foolish. Tax laws will change.
• Personal finance is largely about emotions and behavior: math plays less of a role than one might think.
• Seeing a lawyer for common transactions might encourage one to marry just to avoid using a lawyer.

Your question also represents the misunderstanding that much of personal finance is about math; it is also about behaviors and emotions. We marry for a lot of reasons, and many of them have nothing to do with math. Tradition, religious beliefs, treatment by others all play into it. For example, some women want a Tiffany ring for their engagement. They could have larger diamonds for less money by buying an off-brand that only a select few can differentiate, but that is what they want. The whole thought and purchase of rings plays into your question but also provides a bit of an answer.

The thought of involving lawyers in my financial affairs would probably lead me to marriage anyway. Dealing with lawyers is expensive, time consuming, and they often make mistakes. Buying a home is stressful as is. Adding another layer onto that may lead a person to marriage despite any tax inefficiency.

Also, this site is full of questions regarding tales of woe where unmarried partners bought assets without involving lawyers. Every significant purchase including cars would require the intervention of a lawyer. No thank you.

The new tax laws may have also made your question not applicable. In 2020 only individuals who make more than $518,401 that also have a spouse that makes more than $103,650 experience some tax inefficiency. That inefficiency is experienced on each dollar earned above those numbers. So, if a wife earns $520k/year and her husband $110K, they would pay about $167 more in taxes per year than if they remained single. That is not to say tax laws will not change in the future, but that is a point to consider. Basing life decisions on current tax law is a bit foolish as it will change. It should be noted that very few households will fall into this income category.

Some high-income couples actually benefit mathematically from being married. For example, in some locations, obstetricians put all their assets in their spouses' names and do not carry malpractice insurance. The insurance is so expensive, and the frequency of successful lawsuits so common, that this is the best practice. When a dead or injured child is involved, the plaintiffs will be awarded some money regardless of liability.

Answer 2

In addition to Pete's answer outlining the legal and other benefits of marriage, I would add the financial benefit of being able to transfer money and assets between the spouses without incurring gift tax. This could greatly outweigh the higher taxes.

Answer 3

I'll add an answer from the numbers point of the view - what exactly is the potential inefficiency?

This answer's going to use the 2019 Tax Computation Worksheet for taxable incomes over 100k, and checking the difference between two incomes filed separately versus one filing jointly.

Let's get started!

T-Income A  T-Income B   Inefficiency Amount
100k        100k         $0
            200k         SAVINGS of $3142
            300k         SAVINGS of $7735
            400k         SAVINGS of $7981
            500k         SAVINGS of $7981

200k        200k         $0
            300k         SAVINGS of $123
            400k         SAVINGS of $123
            500k         $1630

300k        300k         $0
            400k         $1753
            500k         $3753

400k        400k         $3753
            500k         $5753

500k        500k         $7753

The reason for the inefficiency comes down Column D:

You'll notice that the Percentages in column B line up. If the two people are making a million dollars a year, it doesn't matter percentage-wise how they file: they're taxed at 37%. The only difference is that Subtraction amount in Column D. Which means the most that the inefficiency can be is $8165 (because that's 35012.5 x 2 - 61860)

And while $8165 sounds like a lot for an inefficiency... I'm not making $600k/year (nor is my spouse.) And I'm not looking at a tax burden of about around a third-of-a-million dollars.

Short Story: The absolute worst case for inefficiency is for two people earning about $510k/year each, which translates to... an additional 2.6% of tax paid. So at that point, you're making a major life decision on whether it'll get you a "Pay only 98% of your taxes" coupon.

Answer 4

Children. It's really that simple. It sometimes transcends money at that point.

Edit:

In response to the 18 upvotes on a "care to explain" comment, there are plenty of legal protections and rights that are established automatically for legally married couples when they have kids. Since laws are free to change, sometimes drastically and due to court interpretation, why take a chance?

I mean, people buy term insurance knowing that they most likely won't ever need or have use of it. They know the insurance companies are going to pocket more than they give out. Yet, people still want downside protection. Think of marriage as insurance against stupid laws.

Answer 5

One good reason is that your spouse can not be forced on the stand in court against you. Your spouse should be someone you are able to trust and be open with. This gives your the legal ability to do so without worry. Money is less important than trust.

Answer 6

Comparison shop two employers' health insurance total costs. Before kids, two singles on the plans our employers offer was slightly cheaper than one family, but now that we have a kid, we are better off under one family plan than a single and head of household on the order of $40 per biweekly payroll period, approximately $1000 a year. My employer's ER and specialist co pays are slightly cheaper, but my wife's Rx formulary is wider (hint: if you're operating from a position of knowledge for a specific condition look deep) and Rx copays cheaper, which adds up once you have routine prescriptions. We get the option to choose each open enrollment based on plan changes and what we know about our health.

Other benefits too: My wife's defined benefit pension has a spouse lifetime payout feature.

Answer 7

My salary is six figures, and I'm marrying someone who makes twice as much. Why bother?

As mentioned, if you do the math, the "marriage penalty" is not actually that bad. Under current tax policy, we break even. Maybe that changes in the future, but who knows. It could change in the other direction too.

Also, yeah, we didn't do the math until we'd already decided to get married. It was an emotional decision. The math would have had to be REALLY bad in order to change our minds.

The other legal benefits might also be worth it, even if the math is against you. I'm slightly old-fashioned; if you want me to sign a mortgage with you, have your babies, or otherwise enter a multi-decade commitment, I'm going to need a signed contract outlining our rights and responsibilities in this partnership. We've been together for eight years, and we're at the stage of life where mortgages and babies are an option. We're in our thirties and hopefully will not need the legal next of kin stuff anytime soon, but it's not irrelevant either.