Wedding Debt
Many couples start off married life with a huge one-time expense: a big wedding. The 2013 Real Weddings Study conducted by The Knot found that the average wedding in the United States costs nearly $30,000. Of course, this “average” is probably skewed upward by the few couples who had incredibly lavish weddings, as well as by the demographics of The Knot readers. But it’s clear that at least some couples actually spend $30,000 or more for a one-day event.
More troubling still is that many couples go into debt to pay for their big day. According to MarketWatch, about 36% of the couples in The Knot’s survey say they used credit cards to finance their wedding, and 32% say they borrowed money so they could go over their budget.
This is a big problem not just for their finances, but for their future happiness. A 2012 study by the New Economics Foundation shows that people who have credit card debt are generally unhappier, and unmanageable debt can lead to mental problems like anxiety and depression.
The Marriage Penalty
After the honeymoon is over, married couples come home and settle into a new routine together. Getting married changes a lot of things about your living situation, from household chores to leisure time. One of the changes many newlyweds have to adjust to is filing a joint tax return – which, in many cases, means dealing with the marriage penalty.
The marriage penalty exists because tax brackets – the income levels at which tax rates shift – aren’t exactly twice as high for couples as they are for single people. As a result, couples who file their taxes jointly sometimes pay more than they would as two single people. For instance, a couple making $200,000 a year may pay a higher percentage of that income in taxes than a single person making $100,000.
However, not all couples actually pay this penalty. In fact, when one spouse earns all or most of the income, the couple often gets a “marriage bonus,” paying less in taxes for their joint income than they would individually. The penalty usually affects couples in which both spouses earn about the same amount of money – a situation that’s more common among high earners. In general, the more a couple makes, the steeper the penalty they pay.
However, in some cases, the marriage penalty can hit low-income couples hard. That’s because people who qualify for the Earned Income Tax Credit (EITC) get less money back when they file a joint return. In 2014, a childless couple with a combined income of $17,000 would get only $230 from the EITC. By contrast, two single people making $8,500 would each get $465, so this low-income couple would pay a penalty of $700 – about 4% of their total income.
Other Tax Issues
Leaving the marriage penalty aside, married couples definitely get some tax perks that aren’t available to single people. These include the following:
- Extra Deductions. Even if your income doesn’t double after marriage, your income tax deductions can. Thestandard deduction the IRS allows for couples is exactly twice as high as the deduction for single people. In addition, most couples can deduct a personal exemption for each spouse, which is $4,000 apiece for tax year 2015. These doubled deductions effectively give a bonus to couples with one nonworking spouse who wouldn’t file a tax return otherwise.
- Estate Taxes. If you leave behind a substantial estate when you die – “substantial” meaning $5,430,000 or more in 2015 – the government skims off an estate tax before the money passes to your heirs. However, any money you leave directly to your legal spouse is exempt from this tax. If you have $10,000,000 and leave it all to your spouse, the government can’t touch a penny of it.
- Gift Taxes. Some people try to get around the estate tax by giving large sums of cash to relatives before they die. To close this loophole, the IRS charges a “gift tax” on any gifts of $14,000 or more. However, like the estate tax, this tax doesn’t apply to your spouse. You can give your spouse any sum of money – or other valuable items, such as jewelry – without paying tax on it.
- Home Sales. When you sell your home, you don’t have to pay capital gains tax on the first $250,000 of profit if you’re single. But if you’re married, and you and your spouse have both lived in the house for at least two of the last five years, this exemption doubles. That means you can make $500,000 on the sale of your home and pay no tax at all.
Health Benefits
Married couples often have more choices for health insurance coverage. If employers of both spouses provide health plans, they can each keep their own workplace coverage, or they can both join one spouse’s plan. This gives them more options to choose the doctors they prefer or to save money on premiums.
If one spouse doesn’t have health coverage from work, then health benefits are even more important. Getting married makes it possible for the uninsured spouse to get coverage through the other spouse’s employer. According to Consumer Reports, this is almost always more affordable than paying for an individual policy, since insurers usually charge less for one policy that covers two people than they do for two separate policies.
Retirement Benefits
Married couples have more options when it comes to retirement benefits, as well. These include:
- IRA Contributions. If you’re single and unemployed, you can’t make contributions to an Individual Retirement Account (IRA). However, if you’re a stay-at-home spouse, you can set up a spousal IRA and make contributions out of your joint income.
- Inherited Benefits. In many cases, if you inherit another person’s traditional or Roth IRA, you must start making withdrawals from it promptly – and if it’s a traditional IRA, you must pay taxes each time. But if you inherit your spouse’s IRA, you have the option to transfer it to an IRA in your own name and make no withdrawals until you retire.
- Social Security. Married couples have many more options for collecting Social Security benefits. You can either collect your own benefits or take a payment equal to 50% of your spouse’s benefit – even if that’s more than you’d be entitled to on your own. You can also choose to delay your own benefits to increase the payout and take the spousal benefit in the meantime. Even a nonworking spouse who has never contributed to Social Security at all can still collect spousal benefits.
The Risk of Divorce
Perhaps the greatest financial risk of getting married is the possibility of ending up divorced. While being married is generally better for your wallet than being single, getting a divorce cancels that benefit – and then some. The OSU study shows that on average, divorced people have 77% less wealth than single people in the same age group.
Interestingly, the drop in a couple’s fortunes doesn’t happen immediately after the divorce. In fact, the couple’s wealth usually starts to decline about four years before they actually end the marriage. Jay Zagorsky, the author of the study, says this could happen because many couples separate first before they officially divorce, taking on the additional cost of maintaining separate households. Another possibility is that the stress of a failing marriage hurts each spouse’s ability to work and earn money.
The impact of divorce continues long after a couple splits up. The newly single people see their wealth start to creep upward again within a year, but it doesn’t increase very fast. Even 10 years after a divorce, their median wealth is still below $10,000 – less than the $11,000 average for people who stayed single.
The Role of Parenthood
Bringing up children is a huge expense. The annual report “Expenditures on Children by Families,” published by the U.S. Department of Agriculture (USDA), shows that a family with a child born in 2013 can expect to spend more than $245,000 raising that child to adulthood.
Decades ago, this cost was something that seldom affected single people. An analysis by the Pew Research Center shows that in 1960, only 9% of all children lived in single-parent homes. Today, by contrast, more than one-third of all children live with just one parent. In 2011, 41% of all babies were born to single parents.
Having children is a financial game-changer for both single and married people. Childcare and increased housing costs eat up a large share of any parent’s income. However, there’s no doubt that raising kids is easier with two people to share the burden. Not only do couples tend to have higher incomes, they also have more choices for dealing with childcare.
Childcare Costs
A 2015 survey by Care.com finds that for most families, childcare is the single biggest expense in the budget. Keeping just one child in daycare costs an average of $181 a week, more than $9,400 a year. With two children in daycare, that cost jumps to $341 per week, more than $17,700 per year.
However, for many married couples, there are ways of avoiding this cost. Couples have options that aren’t available to most single parents, such as:
- Stay-at-Home Parenting. Some parents avoid childcare costs by having one spouse quit working – at least for a year or so – to care for the children full-time. Mothers are more likely than fathers to take on this role. A 2014 study by the Pew Research Center found that in 2012, 29% of all mothers were stay-at-home moms, up from a low of 20% in 1999. However, a second Pew study that same year found that stay-at-home dads were also on the rise. In 2012, 16% of all stay-at-home parents were fathers.
- Work-at-Home Parenting. New technologies, such as email and teleconferencing, make it possible for some parents to work from home, where they can also keep an eye on their kids. Although this job arrangement is sometimes possible for single parents, couples with two jobs have a better chance of converting one of those jobs to a work-at-home position. It’s also easier for one parent to do this when the other has a full-time job, since many work-at-home opportunities are on a freelance basis, and freelance jobs often have unpredictable income and no benefits.
- Split-Shift Parenting. Some parents choose to adjust their schedules so that one of them is always at home with the kids. For example, news anchor Lisa Scott explains in Working Mother how her husband works the overnight shift as a machinist, returning home just minutes before she has to leave to do the morning and midday news. Split-shift parenting means both parents get to spend time with their children, but it leaves them very little time to spend with each other, which can put a strain on the marriage.
Housing Costs
According to the USDA report, housing costs are the single biggest factor in the cost of raising a child. For middle-income parents, 30% of the money spent on a first child goes toward increased housing costs, while childcare and education account for only 18%.
Part of the reason for this is that a bigger family simply needs more space. A family with two children needs at least two bedrooms, and preferably three, while a single person or a couple with no children can get by with one. However, parents also tend to pay more for housing because they want their kids to be able to go to the best schools, and homes in these school districts tend to be expensive.
In September 2015, CBS News calculated what it cost to live in the 10 top-ranking school districts in the country, as rated by the education-review website Niche. In 7 of the 10 towns, the median home price was over $475,000. In 2 of the 10, it was more than $1 million. By contrast, the median home price for the whole country, as reported in by the National Association of Realtors, was only $221,000.
Fortunately, there are some exceptions to this rule. For instance, one of the top 10 school districts named in the CBS article is McCandless Township, Pennsylvania, where the median home price is just $206,200. A website called Neighborhood Scout has identified affordable neighborhoods that also have good schools in the nation’s 20 largest metropolitan areas. Choosing a home in one of these neighborhoods can help parents keep their housing costs in check while still giving their children a great education.
Tax Breaks for Parents
Because raising children is so expensive, the IRS provides an array of tax breaks for parents to help offset the cost. For starters, parents can claim personal exemptions for their kids, as well as for themselves. This knocks $4,000 off their taxable income for each child.
In addition, parents are eligible for a variety of tax credits and perks, including:
- The Child Tax Credit. This credit reduces parents’ taxes by up to $1,000 per child. Married couples with combined incomes up to $110,000 can take the full amount. So can single parents with incomes up to $75,000, regardless of whether they file as “single,” “head of household,” or “qualifying widow or widower.” Above these income levels, the credit gradually shrinks. This is a case in which single parents actually benefit from their single status. Two single parents, each with one child and a $75,000 income, could each get a $1,000 credit. However, if they got married to each other, this two-income, two-child family would get no Child Tax Credit at all.
- The Child and Dependent Care Tax Credit. Parents who have to pay for childcare can deduct a portion of these costs through the Child and Dependent Care Tax Credit. This credit provides up to $3,000 for the care of a child under 13, and up to $6,000 for two or more. There’s no income limit for this tax credit, but the percentage of your costs that you get back is lower for higher incomes. It starts at 35% for incomes up to $15,000 and gradually drops down to 20% for incomes of $43,000 or more – no matter what your filing status is. That means that a single parent with a $30,000 income, who pays a typical $9,400 a year for day care, could get back 27% of that amount, or $2,538. By contrast, a married couple with a $60,000 income and the same day care expense would get back only 20% of the cost, or $1,880 – just $940 per person.
- Flexible Spending Accounts. Parents can also offset their childcare costs by using a flexible spending account (FSA), if their employer offers one. With an FSA, a parent can set aside up to $5,000 in pretax dollars for childcare. In most cases, this is an alternative to taking the Child and Dependent Care Tax Credit. However, parents who have two or more children and childcare expenses of more than $5,000 per year can do both, setting aside $5,000 in an FSA and claiming a tax credit for any costs over that amount.
Having a child also increases the amount you can get from the EITC. For people with no children, the maximum credit is $503 for tax year 2015. However, this amount jumps to $3,359 for people with one child and maxes out at $6,242 for parents with three kids or more. These numbers are the same for single and married parents.
Having kids makes it easier to qualify for the EITC as well. A single person with no children needs an income of $14,820 or less to qualify for the EITC, but a single person with one child can qualify with up to $39,131 in income. For a married couple, the limits are $20,330 with no kids and $44,651 with one. Additional children increase these limits still more.
The EITC Assistant from the IRS shows how the EITC differs for single parents and married ones. A married couple with two children and an adjusted gross income (AGI) of $40,000 would get $1,929 from the EITC – just $965 per person. By contrast, a single person with two children and an AGI of $20,000, filing as head of household, would get $2,954. So as you can see, this is a case where the marriage penalty deals a big blow to married couples.
Tax Filing Status
All the tax credits listed above are available both for couples who file joint returns and for single parents who file as head of household. Parents who file as head of household have lower tax rates than other single people, and they can also take a higher standard deduction. Compared to married couples, they pay more in taxes for the same amount of income – but they still end up paying less per person.
For instance, a head of household who earns $40,000 per year, after all deductions and credits, pays $5,432.50 in taxes on that income. A married couple with the same $40,000 income between them would pay only $5,077.50. However, a married couple where each spouse earned $40,000, for a combined income of $80,000, would pay $11,587.50 – more than twice as much as the single head of household.
The situation with the standard deduction is the same. A head of household’s standard deduction for tax year 2014 is $9,250. That’s less than the $12,600 a married couple can deduct, but it’s far more than the $6,300 each spouse in that couple gets. So this is another case in which single parents get a much-needed break.
Sharing a Home
Jay Zagorsky, the author of the OSU study, speculated that the reason married couples save more than single people could be that they’re more likely to share a household. By sharing expenses such as rent, food, and utilities, they can spend less than two single people who live alone.
The annual Consumer Expenditure Survey conducted by the Bureau of Labor Statistics supports this theory. It shows that the average single person spends $36,585 per year, while the average two-income couple spends $69,785. By combining their expenses, the couple saves $3,385 each year.
However, these benefits aren’t just for married couples. Single people can get them too, by sharing a home with aroommate, a family member, or a significant other. Sharing a household is one of the best ways for single people to close the wealth gap and start saving early for big expenses down the road.
Shared Expenses
According to an old saying, “Two can live as cheaply as one.” That’s not exactly accurate, but it’s definitely true that two people living together, sharing all their expenses, can live more cheaply than two people maintaining separate households.
Housing costs are a good example. Suppose two people are living in separate, identical one-bedroom apartments, paying $1,250 a month for each. If they move in together and share just one of these apartments, they immediately cut their rent in half. Even if they upgrade to a two-bedroom apartment to give themselves more space, they can still cut their total housing bill by a sizable amount. A 2015 survey by the financial site SmartAsset found that in some cities, sharing a two-bedroom apartment costs as much as $800 less than renting a one-bedroom on your own.
People sharing a household can save on all sorts of other expenses as well. It’s easier for them to buy groceries in bulk – for instance, getting a gallon of milk instead of a half-gallon without worrying that it’ll go bad before it’s used up. They can share one landline phone bill, combine their home insurance policies, and share loads at the coin laundry. All these savings can add up to thousands of dollars each year.
Shared Responsibilities
People who live alone not only have to pay all their own household expenses, they also have to do all the work of maintaining the home by themselves. Keeping up with cleaning, cooking, laundry, and all the other household tasks can feel overwhelming. After a while, it becomes tempting to hire someone else to take care of it – and that can get expensive. According to Angie’s List, the average cost of a biweekly house cleaning is between $100 and $150, or $2,600 to $3,900 per year.
By contrast, living with a partner or a roommate can ease the burden on both of you. If one person cooks dinner, the other can do the dishes; if one does the laundry, the other can clean the bathroom. Since cooking or cleaning for two people doesn’t take much longer than doing it for one, this cuts way down on the amount of time these chores take.
People who live alone also pay for services in ways that are less obvious. For instance, when you’re going through a crunch at work, you often get home late and don’t have the time or the energy to cook. If you share your home, you can ask your partner or your roommate to take over the cooking for you until your work crisis is over.
But if you live alone and don’t have this option, you’re more likely to end up eating out at restaurants every night. Eating out costs a lot more than cooking at home – anywhere from $4 for a burger and fries at McDonald’s, to $50 or more at a French bistro. Alternatively, you might turn to convenience foods from the grocery store, such as frozen dinners, to get you through your busy period. These are cheaper than a restaurant meal, but they’re still far more expensive than cooking from scratch.
Savings Tips
Of course, getting married isn’t really a decision you can make, or should make, on the basis of what’s best for your wallet. You’ve probably already decided whether being married or single is best for you, at least for now. So what you really need to know is how to make the best financial choices for whichever situation you are in.
Savings Tips for Couples
As part of a married couple, you get a big financial boost from sharing a household. However, that advantage only helps you if the marriage lasts – so the single most important thing you can do to help your finances is to avoid divorce.
As it happens, this advice also works the other way around. A 2013 survey by the Institute for Divorce Financial Analystsshows that money problems are one of the leading causes of divorce. So anything you can do to keep your marriage financially sound can also help you avoid a costly divorce.
Here are some ways couples can keep their marriage on a strong financial footing:
- Avoid Wedding Debt. Don’t burden your marriage with debt by having a wedding you can’t afford. A 2014 study atEmory University shows that the more couples spend on their engagement ring and wedding ceremony, the shorter their marriage is likely to be. Women who spent more than $20,000 on their weddings were 3.5 times as likely to divorce as those who spent between $5,000 and $10,000. So having a budget-friendly wedding is a much better way to get your marriage off on the right foot.
- Maximize Your Benefits. Married couples get lots of perks for taxes and health and retirement benefits, so make the most of them. Compare health plans for both spouses’ workplaces and choose the one (or both) that gives you the most bang for your buck. Get a good tax professional, or a good piece of tax software, to make sure you’re getting all the tax credits you’re entitled to as a couple. And as you near retirement age, look into your options for collecting Social Security to get the most out of your combined benefits.
- Communicate About Finances. A 2012 study at Kansas State University found that arguments about money are the leading predictor of whether a couple will divorce. So it’s incredibly important to communicate about money with your spouse and make sure you’re on the same page about your financial goals and expectations. Talking regularly and openly about your finances will strengthen not only your bank balance, but your whole marriage.
Savings Tips for Singles
For single people, the easiest way to save money is to find someone to share living expenses with. By sharing a home, you can save on everything from rent, to phone bills, to groceries. You can also share household chores, leaving both of you more time to work and earn money.
Of course, this only works if you actually do your own household chores, including cooking. If you don’t already know how to cook, learning how is one of the best investments you can make. Find a good cookbook, master some simple recipes, and keep your freezer and pantry well stocked so you never end up ordering a pizza because there’s nothing to eat in the house.
One particular expense single people have that married people don’t is the cost of dating. Sure, some married couples make a point of having a monthly “date night” to get away from the kids and reconnect, but that’s not the same as dating on a regular basis. To keep this expense under control, try some inexpensive alternatives to dinner and a movie. Cheap date ideas include art museums, community events, a movie night or game night at home, or just a romantic walk in the moonlight.
A bonus of going on cheap dates is that it helps you weed out potential partners who have expensive tastes. That way, if you eventually decide to get married, you’re more likely to end up with someone who wants to share your frugal lifestyle. Newlyweds interviewed by LearnVest say their partners have a big influence on their approach to spending. People who marry “savers” tend to cut back on their expenses, while those who marry “spenders” start to splurge more.
Final Word
There’s no doubt that being married offers some advantages compared to being single. However, it’s much better, both financially and emotionally, to stay single than to marry the wrong person. Marrying someone who doesn’t share your values and goals is a good recipe for a bumpy marriage and, quite possibly, a painful and expensive divorce.
So if you’re single now, but you plan to marry someday, the most important thing you can do is to choose your partner carefully. Make sure you understand and agree with each other’s financial goals so you’re working together and not against each other. And if you’re married already, it’s not too late to have this conversation. By taking the time to talk about your financial needs and goals, you can keep your marriage, as well as your finances, strong.