Some Financial Issues For Couples
Wednesday - December 20, 2006
This will be the last installment of The Young View’s 2006 money management series. A big “mahalo” goes out to Brian Y. Chang, CFP, CLU, ChFC, CFS of Deutsch & Chang for his invaluable expertise and advice.
In this last segment before 2007, we examine the financial issues of unmarried couples vs. married couples.
These days plenty of couples are choosing to live together before marriage, which can potentially be a tricky arrangement where finances are concerned. These are some things to consider before you make the decision between marriage and co-habitation (as least as far as the money aspects go).
According to the book my best friend bought me (The Complete Guide to Personal Finance in your 20s and 30s), one advantage of living together includes cutting your housing costs by about 50 percent by sharing the rent. You’ll also be sharing costs for utilities and other living expenses such as groceries.
According to Chang, there are also advantages and disadvantages for live-in couples who aren’t married when it comes to taxes.
“If two people in a relationship have equivalent incomes, then they will probably pay more in taxes if they were married filing jointly than if they are two single people,” he explains. “That’s because the income tax brackets for married couples are not exactly double the income tax brackets for single people. For example: For 2006, to stay in the 25 percent tax bracket two single people can have taxable incomes of $74,200 each or $148,400 total, whereas married people can only have a maximum of $123,700.
“This ‘marriage penalty’ has been eliminated for the bottom two tax brackets (10 percent and 15 percent), but gets worse the more money you make. The opposite is true if one spouse makes a lot more than the other spouse. If this is the case, then overall both people would probably pay less in income taxes as a married couple than two single people.”
Other things to consider include the credit card debt of your partner. “A bad credit history would affect your ability to combine your incomes to qualify for loans,” says Chang. “What kind of debt does your significant other have? Is it from school loans where it may be deductible? If so, it would only be deductible if your income is below certain thresholds. Will getting married knock that person out of the box for taking the tax deduction?”
My book also lists other financial disadvantages for unmarried couples such as health benefits, which may be offered to spouses of employees but not to a person with whom the employee lives.
Life insurance, pension, Social Security and other programs are also areas where, to receive the benefits in the event of the death of your significant other, you would need to be legally married.
A good strategy for unmarried couples to take, says Chang, is a “yours, mine and ours” approach to finances.
“Each person has his or her separate bank account from which they pay their own personal bills and use for their own spending money,” he says. “The ‘ours’bank account is the account from which all bills jointly incurred are paid (rent, electric, etc). Each person contributes to this account. This way, if a breakup occurs, most of your personal assets are already separate and you only have to contend with the joint account.”
The thing is, while divorce laws are pretty clear in most states, there are few laws that deal with breakups of couples who have lived together. We all want happily-ever-after, but the reality is breakups happen. Couples often live together nowadays first for that very reason: to see if they are compatible housemates as well as lovers.
I’m the first one to throw caution to the wind in the name of romance, but when it comes to finances, it’s much better to be safe than sorry. Know all the facts of your finances first.
And for those whose live-in situation makes the leap to marriage, well, then you have a whole other set of financial agreements to make.
Here’s to much financial health and happiness in 2007!
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