After the wedding, I started taking a closer look at the tax numbers and incorrectly concluded that the only time someone would ever file as “married filing separately” would be if one partner earned a whole lot and one partner earned not as much. The logic was that the lower earner wouldn’t be subject to the same tax rates as the higher earner and thus the difference would overcome the different tax brackets. The only correct assumption I made was that the lower earner wouldn’t lose access to any tax advantaged accounts, like Roth IRAs, because they’d still be over the limits for those types of accounts. I already gave out my hypothesis and my result (I was wrong and am now clueless as to why anyone would file separately if both options were available) but here’s what I did.

Hypothesis: Married Filing Separately shares more of the lower tax brackets as Single filers but you lose practically all of the favorable tax benefits that Single filers enjoy. The benefit of filing separately is if you have a significant disparity in income with the sum total above many of the tax beneficial limits. (this hypothesis is proven wrong)

2008 Tax Brackets

(taken and amended from my 2008 tax bracket post)

Three Scenarios

What happens with a couple earning $100,000 with one earner taking in $80,000 and one earner taking in $20,000?

• Married Filing Jointly: $17,687.50
• Married Filing Separately: $16,772 + $2,197.5 = $18,969.50 (correction)

That’s a difference of $2,802.50 but both individuals lose access to a Roth IRA (among other significant benefits).

What about a couple earning $200,000 with one earner banking $120,000 and one banking $80,000 would pay (this doesn’t take into account deductions):

• Married Filing Jointly: $44,744
• Married Filing Separately: $28,964.50 + $16,772 = $45,736.50

What!? It’s more to file separately… maybe the disparity has to be greater. What if a couple earned $400,000 with one earner banking $320,000 and one banking $80,000?

• Married Filing Jointly: $58,787
• Married Filing Separately: $49,402.5 + $16,772 = $66,174.5

Two Potential Reasons to File Separately

So, I tried to do more research and discovered this great About.com article and according to William Perez, filing separately makes sense in two basic scenarios:

1. “Filing separate returns makes the most sense when one spouse owes a significant amount of money, but the other spouse could get a refund.”
2. “It also makes sense when one spouse is cheating on their taxes, and the other spouse doesn’t want to be involved.” (Nice!)

Let’s ignore scenario #2 because anyone who lets someone else knowingly cheat on taxes doesn’t really need to worry about their tax bill, they have bigger issues. With scenario 1, you have to be in such a small window, for both earners, such that the lower earner’s deductions will save them more than the higher earner loses by filing separately (as evidenced by our 80/20 example above). The 25% tax bracket starts at $32,550 for married filing separately but starts at $65,100 for married filing together! I suppose the numbers have to be in that range for this to make sense… but then you start giving up great benefits such as a Roth IRA, which is available if your total AGI is less than $156,000 when you file jointly but only $10,000 when you file separately! (plus, I don’t know if I’d classify someone earning $80,000 as someone who would owe a “significant amount of money,” hence my 120/80 and 320/80 examples)

Plus, if you read the article some more, there are so many headaches involved in filing separately (both have to take itemized or both take standard, state taxes are a pain in many states, etc.) that I can’t even imagine the strangely specific scenario in which filing separately truly makes both financial and psychological sense.

Why would you file separately if you could file jointly?

Hat tip to Ryan Waggoner for providing this Quicken post with some solid reasons for married filing jointly, the main financial reason happens to be in the blind spot of my analysis, itemized deductions.

A few months ago I discussed the idea of combining finances when a couple gets married and this guest post by Pinyo of Moolanomy is very appropriate since my wife and I are currently on our honeymoon!

One of the last things that most couples think about before getting married is money. Unfortunately, one of the most common reasons why couples go through a divorce is also money. I have to admit that when I got married, money wasn’t the first thing on my mind — it was love. Although we each have our own financial quirks, I have to say that we are lucky to be about 99% financially compatible.

Combined Finances Is Best

For the most part our money is combined; except for our IRAs and my 401k, all of our accounts are joint. However, I don’t meddle much in our Citibank account, which was originally hers, and she still considers it hers (that’s where she deposits her paychecks). And for the most part she doesn’t meddle in our brokerage account, which was originally mine (that’s where I deposit my paychecks).

We operate semi-independently — i.e., we each pay our own bills, more or less. But the nice thing is that I can always ask her for money if I am short, or vise versa. In general, I tend to be the one who’s short on cash because I pay most of our household expenses — i.e., mortgage, property taxes, utilities, etc. (that how it was before we got married). Basically, we each have our own little financial domain, but in truth we give to each other without hesitation and without keeping track. Well it probably doesn’t matter for her, since she told me more than once that what’s hers is hers, and what’s mine is hers.

Separate Finances Is Best

As much as I want to say that the way my wife and I handle our finances is the best, I couldn’t. My parents have been married for over 30 years and they kept their finances separate. They each have their own accounts and don’t meddle in each other financial affairs. Actually, my mom doesn’t let my dad mess with her money, because she thinks he’s irresponsible. For me, his only quirk is his kindness and generosity.

So, there’s evidence to suggest that this method works too.

Which Is The Right Answer?

The answer is, I don’t know. But here are a few things that seem to help — whether you combine or separate your finances:

• Share financial information openly.
• Create and work toward common financial goals.
• Agree on basic ground rules — i.e., what each spouse can spend without consulting with each other.
• Be supportive (both financially and emotionally) when your spouse is in need.
• Don’t keep a tally, especially for little things. In fact, don’t fret the small stuff.

In the end, I don’t think there’s a single right answer, and each couple has to make it works for them. Although I do believe that the worst thing any couple can do is not talking to each other about money.

This is a guest post from Pinyo. He can be found at Moolanomy where he writes about investing, wealth building, and other personal finance topics. If you enjoyed this post, please subscribe to his RSS feed!

This is a guest post by Lynnae of Being Frugal.net, a blog about frugal living and paying off debt. If you like this post (and I trust you will), subscribe to Lynnae’s blog via RSS or email, you will not be disappointed.

Since Jim is newly married and off on his honeymoon, I thought I’d take the time to focus on marriage and money. I’ve been married almost 13 years, and though my husband and I don’t argue about money much these days, there are a few things I wish I would have realized at the beginning of my marriage. It would have made the first few years a lot easier.

Your Priorities Will Be Different

This one seems obvious, but it’s often not to newly married couples. Too often couples get married and expect to agree on most things. Sometimes the difference is dramatic. The wife wants to buy a whole new wardrobe every season, while the husband wants to sock away lots of money for retirement. Or it might be more subtle. The husband might have a Star Wars collection that the wife just doesn’t understand.

Whatever the difference, it’s important to discuss things calmly and compromise. Putting away money for retirement is obviously very important, but if your wife is feeling strangled, because you complain every time she buys a new skirt, you’re headed for trouble. Realize your spouse’s priorities and compromise on those things.

A good example of this is Gibble, who recently bought his wife a new engagement ring after the original ring was lost. Yes, the money could have been used for debt repayment, but this was very important to his wife, and I think he made a wise choice.

Good Communication is Key

Talk and talk often. As the years go on, individuals change and grow. Priorities change. It’s important to keep the lines of communication open, so you are always on the same page with the finances. By talking about little issues as they come up, you can avoid the big all out fights that seem to happen when an issue festers and isn’t dealt with right away.

My husband loves sports. If it were up to him, we’d have every seasonal sports package on our satellite subscription, he’d subscribe to all the big sports magazines, and we’d have satellite radio, so he could listen to every game he wanted to in the car. That’s not going to happen.

Still, there are plenty of times when my husband comes home with a Fantasy Football magazine, or a NASCAR publication. I don’t understand the need to buy the magazines, because you can get all the information online. However, since I’m constantly in communication with my husband, I realize that this is how he relaxes. Knowing that, it’s much easier to just let the spending slide as long as it’s not out of control.

Be Honest

There will be a time when one of you does something financially stupid that you don’t want to ‘fess up to. Here’s my advice. Come clean. Right away. Trust and honesty are much more important in a marriage than saving face. It might be a difficult conversation, but in the long run, your willingness to be honest with your spouse will pay big dividends.

For the Men: Allow Your Wife to Buy Pretty Things

I know a lot of men think pretty clothes and soft throw pillows for the couch are a waste of money. But for a woman, these things make her feel feminine. You will have a much happier wife if you allow her these little indulgences. And if you allow her to indulge herself, she’s a lot less likely to complain when you buy the sports magazines.

For the Women: Respect Your Man

There may be times when your husband’s career doesn’t go as planned. He may even lose his job at some point. Nobody plans for these things when they get married, but little hiccups in the career are a part of life.

If your husband is discouraged on his job, you need to be extra encouraging at home. According to my husband, there’s nothing worse than feeling like a failure on the job, only to come home and feel like a failure with your wife. When your husband’s job isn’t going well, if you continue to support him, it will boost his morale and help him stay motivated to find a better job. He will also never forget that you stood by his side in the trenches of life.

Keep communicating, be understanding, and remember you are on the same team. That’s what it all comes down to.
Congratulations Jim and Mrs. Jim! I hope you have a wonderful time on your honeymoon!

One of the benefits of creating my Personal Finance Users Guide was that I learned that we an overabundance of unused bank accounts and credit cards. In years past, each one had their purpose but have since been made obsolete. For example, one is a credit union near my home town that linked my finances with my parents and was important while I was in college. Having graduated many years ago, this link has become less and less important. Another example is a credit card I had in college that never kept up with the times in offering competitive cash back (Discover). Yet another is a credit union account at my former employer, one I kept just to have a local credit union account available (they have extremely good loan rates). However, for each, their time has passed and they need to be shut down.

Simplify!

That’s the mantra for the next few months of my life when it comes to personal finances. One of the things that comes with marriage is the inevitable doubling up of the essentials. A great non-personal finance example would be beds. Every person needs a bed. This inevitably means that when two people get married, you have two beds when you only need one. The same applies for bank accounts and credit cards. She has accounts at a bunch of banks, I have accounts at a bunch of banks, we certainly don’t need them all! (read this discussion about coupled finances and combining accounts, it’s a hot button issue!)

So, we’re getting married this weekend and then going on a much needed vacation honeymoon. When we get back, we’re going to start paring down all of these accounts and getting down to the basics.

Final Thoughts

Some would argue that you shouldn’t cancel your credit cards because it will affect your credit score (read this Devil’s Advocate post arguing otherwise), I say that simplicity is more important than a few points. If you can swing it, try consolidating your cards rather than canceling them. Closing bank accounts doesn’t appear to have a publicly recognized negative effect on your credit, so cut those away at will!

(Photo by eflon)

Whether you’re freelance, are paid every two weeks, or simply have irregular commission-type income, it’s often difficult to budget when you aren’t sure how many dollars are coming in each month. This post was inspired by a friend of mine who was discussing coupled finances. Her husband was paid every two weeks, she was paid twice a month, once on the 15th and again on the 30th/31st. This meant that in each month her income was stable but his wasn’t, on certain months he would have three paydays and she would have two. The disparity between the two wasn’t the issue but budgeting for the difference is because your total household take home pay for that month will vary. This made it a similar problem that freelancers face with irregular entrepreneurial income, for lack of a better term.

Her solution? Direct deposit both of their paychecks into an ING Direct and then have an automatic transfer of funds to their main banking account. In essence, they are “paying” themselves and that payment is regular and equal. This offers two benefits:

• Smooths out that irregular income by taking “converting” a two-week pay cycle into a twice a month pay cycle (15th, 30th).
• Automatic savings, by leaving what you won’t need in an ING Direct, it’s much easier to save because you don’t have to make a conscious decision to save; it’s automatic.

This translates to irregular income folks because you establish a reasonable “paycheck” and keep the rest squirreled away in a high yield savings account.

What’s the alternative to this? The alternative is to just have it deposited into your account and for you to keep yourself on a strict budget, keeping in mind that your income is irregular. With my friends, it was irregular but dependable so the irregularity wasn’t a big deal. With entrepreneurs, it’s irregular and not as rock solid dependable so this system may work out better because it forces you to actively be leaner with your budget so you aren’t caught in a difficult spot if the income slows down.

Anyone have to deal with this issue and have another option? Please do share!

I’m about to get married in a few months and I’ve actually been asked, on multiple occasions, whether we plan on having a prenuptial agreement (technically a prenuptial accord) and the answer is No (and no I didn’t need to think about it ). We’re in love, we’re happy, we’re planning the rest of our lives together… but that’s exactly why now is the perfect time to discuss/negotiate and sign a prenuptial agreement (though we never really discuss the idea seriously, we just assumed we weren’t getting one).

Why?

Some would say that discussing a prenup is like preparing for failure (it’s a very emotional response and understandable) but then I would argue why does anyone by insurance? I’m not averse to the idea of getting a prenup, it’s just that I don’t see it as necessary and I don’t want to pay some lawyers my hard earned money for something I don’t feel is necessary. Would you pay a dentist to remove your wisdom teeth if they weren’t bothering you? Probably not.

Why Now?

Discussing a prenup doesn’t exactly jazz up relationships, especially when you’re in love (awww!), but right now, right before marriage, is the best time to talk about this sort of thing because now is when things are most cordial. You want to talk about and sign these agreements, like any other business contract, in the best of times because that’s when you and your partner will agree on something. Whether it’s a partnership for a new business venture or something smaller, like a house, having a written understanding of where each person is, what each person believes, and how things are to be resolved should it come to a mediator is crucial.

You Convinced Me! Now How?

Step 1: Agree
So, if you want to get a prenuptial agreement, or a prenup, here’s what you’ll need to do. (Remember, I am not a lawyer so always consult with one, this is just my interpretation from the readings I’ve found online) The first step is to just write down what you two believe in plain English. If you plan on a split where you each take what you brought in and split everything else afterwards, it helps to has those details now instead of when a high priced lawyer is introduced. You don’t need someone (or someones) in a suit sitting there while you draw up the basics of your agreement, you only need them to put it in that high priced legalese to make it stand up in court.
Step 2: Lawyerize It
Then get two matrimonial laywers, one for you and one for your partner, to draw up the specifics in a legal instrument. In some states, you need independent advisers to both sides or it could be see as unfair and nullify the agreement once you hit the battlefield. Lastly, be sure to revise it every couple of years to keep it current and to keep both party’s understandings in play. One of the revisions could be to do away with the prenuptial agreement entirely, so you want to revisit it every so often.

3 Useful Tips

Here are a few more tips about prenuptials I pulled from a Bankrate article on the subject:

• You can’t waive rights to child support payments (it’s for the children, not for the partner anyway)
• A will can’t supersede the prenuptial agreement if it’s stingier but it can if it is more generous. If the will gives more than the prenuptial, then it can stand. If it gives less, sorry, the prenuptial stands. This is why it’s important to revise the document, you don’t want a prenuptial from thirty years ago forcing your estate into probate instead of going to your partner (if that’s what you want).
• Ensure it is signed in triplicate and three copies are made. One going to each party (bride, groom) and one to an independent party such as a lawyer or a safety deposit box.

So, what do you all think of prenups?

Photo by hekeptme7.

One of the things I’ve been looking at lately, given the upcoming wedding, was how to optimize our insurance policies because, as we all know, multi-policy discounts are one of the best ways to get a discount. Two auto insurance policies with one insurer generally costs less than two separate auto insurance policies with two different insurers. In actuality, only the medical and auto insurance policies can be optimized because you don’t really share any others. Anyway, I was taking a look at our options and here’s what I came up with.

Auto insurance
This one will probably yield the biggest savings. When you decide to combine two auto insurance policies onto one, you get savings because of two reasons: You are statistically less risky because you’re married and the multiple policy discount. When you do optimize your auto insurance, you should do more than just add coverage to your policy (or add coverage to your spouse’s policy). You should start the whole auto insurance purchasing process over again and get multiple quotes so that you can compare. Two of those quotes should be adding you to your spouse’s policy and you adding your spouse to your own policy.

Medical insurance
Theoretically, given no prior negative medical history, one of you will simply go on the other’s policy for some quick savings. For example, my fiancee right now gets free health insurance and would also get free insurance for me if she were to add me to her policy after we are married. That’s clearly the easiest way to go… but there is another option available. If she were to add me to her policy and I were to add her to my policy, we’d get double the coverage. How is this valuable? This is most valuable if you expect to use your insurance a lot because it increases your lifetime limits. In such a strategy, I would submit claims against my insurer first and if they exceeded the lifetime or annual limits, I’d start all over with her insurance plan. The same would work in the reverse.

Are there other insurance policies you can optimize after marriage? Those were the only two I could think of.

Image by Laineys Repertoire.