The hope of marriage is that it brings two people together as one, but that math can sometimes be expensive as many recently married, same-sex couples have learned since June 2015. If you’re a couple with an income gap, here’s what you should know before getting married. Here are also the questions your financial advisor should be able to answer about income disparity and marriage.
What are marital agreements, and why do they matter?
Gone are the days when asking your partner for a prenuptial agreement is considered bad taste. With couples marrying later in life after their careers are established and they’ve acquired assets, marital agreements, such as prenuptial agreements, are considered smart today. With years of life and career under their belts, there’s a chance one partner in a relationship has more assets or a higher income than the other. A prenuptial agreement ensures that neither partner will be taken advantage of because of the marriage.
You probably know that a prenuptial agreement outlines the ownership of a couple’s asset before marrying and specifies who will own what upon the dissolution of the marriage. Traditional provisions in a marital agreement include the division of real estate, investments and business assets, alimony payments and defining roles regarding disability and death. With 40% – 50% of marriages ending in divorce, prenuptial agreements make the divorce process easier, though not necessarily easy.
The problem is, however, that in the processes of falling in love, agreeing to marry and planning a wedding, drafting a prenuptial agreement is too negative for most couples. So, they either avoid it or don’t consider it. Fortunately, there’s a backup plan with postnuptial agreements.
Postnuptial agreements can provide the same provisions as a prenuptial agreement except that the effective date of the postnuptial agreement is the date the agreement is signed, rather than the date of the wedding. So, if you’re reading this after saying “I do,” consider a postnuptial agreement and talk with a financial advisor and an attorney to outline the division of assets and responsibilities should your marriage end in divorce.
What are the effects of marriage on student loans?
Getting back to the idea of marriage bringing two people together as one, marriage also includes the merging of debt, including student loans. For some individuals, marriage runs the risk of drastically altering their student loan repayment plan.
When a lower-income earning spouse is on an income-based student loan repayment plan and is married to someone with a higher income, the income-based student loan repayments can increase significantly because of the household income increases. Such income gaps can, also, alter the likelihood or the requirements of student loan deferments, discharges and bankruptcies for the lower-income earning partner.
How can we qualify for spousal IRA contributions?
Here’s positive news for married couples with income gaps. Spousal IRA contributions permit a working spouse to make Roth or Traditional IRA contributions, currently between $5,500 and $6,500 contingent on the age of the non-working spouse, for the non-working spouse. Therefore, if one spouse stays at home to raise the children or starts a business that has yet to generate money, the working spouse can keep the “non-working” spouse on track for their retirement savings and, thus, keep the couple on track for their retirement.
There are two important requirements however for spousal IRA contributions. The first requirement is that the married couple must file their taxes jointly. The second requirement is that the working spouse’s earned income at a minimum equals the combined total of the non-working spouse’s contribution plus the working spouse’s contribution.
There are scenarios when the deductibility of spousal IRA contributions are phased out and when they’re not permitted. These are the questions about which you’ll want to ask your financial advisor and to which they should be able to speak.
What are the tax consequences of large inheritances on our finances?
If you or your partner are fortunate enough to receive an inheritance, it’s advisable to talk with an estate planning attorney before accepting the inheritance, as the financial and tax consequences can be confusing and vary from state to state.
Unless the person from whom you inherit money resided in or owned property in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, and you are either the spouse or offspring of the decedent, you won’t owe any State Inheritance Taxes. Only the previous six states charge such State Inheritance Taxes and then only do so in certain circumstances.
Likewise, unless you’re inheriting an estate of $11,180,000 or more from someone who passed away in 2018, you won’t owe any Federal Estate Taxes. The IRS outlines the different inheritance minimums that avoid Federal State Taxes for previous years at IRS.gov.
Finally, unless the decedent, not you, resided or owned property in Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont or Washington, you won’t owe State Estate Taxes, different from State Inheritance Taxes. Then, even if the decedent did reside in or own property in one of those previous states, you may only owe State Estate Taxes if you inherited more than the estate tax exemption for that state.
None of the potential outcomes from an inheritance are affected by your relationship status, your net worth or your income. However, your financial advisor should be able to answer questions about inheritances or find the information you’d need should you receive an inheritance. Likewise, a thorough marital agreement should outline the division of inheritances received during the marriage. Finally, after a large inheritance is received, see a family law attorney to update your marital agreement accordingly.
Should we file our taxes jointly or separately?
As you can see from above, there are personal and financial benefits for being married. However, there are also pros and cons with filing taxes separately and jointly. If one partner brings debt to the relationship or on an income-based student loan repayment plan, it may make sense to file taxes separately and protect both partners from adverse financial consequences.
However, if one partner doesn’t have earned income and they wish to stay on track for their retirement savings, the only way to qualify for spousal IRA contributions is to file their taxes jointly. In neither case, it makes sense for most couples to work with an attorney to draft a marital agreement. Marital agreements help protect both spouses’ assets and simplifies the divorce process in the unfortunate situation when a marriage doesn’t last until one spouse passes away.
In every case, your financial advisor should be able to answer these questions or know where to find the information for you. Talking with an accountant and attorney for further clarification of these questions would also help. The fact is, you can’t be too cautious when it comes to your individual and mutual financial security and the security of any children who are a part of your relationship. Finding the answers to such questions sooner rather than later benefits all parties involved.
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