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Goodbye Marriage Penalty—Almost

August 17, 2018 By Guest Blogger

One of the unexpected gifts from the Tax Cuts and Jobs Act of 2017 was the virtual elimination of the so-called “marriage penalty.” But at the same time, the new tax regime imposes a new “stealth” marriage penalty which will show up for taxpayers in higher-tax states.

The marriage penalty is roughly defined as assessing higher federal taxes on married couples with two incomes than would be assessed on the same couple if they had filed individually.  For example, under the old regime, two single filers making $50,000 would each pay at a 25% tax rate.  But a couple who each earned $50,000 ($100,000 total household income) would have been assessed at a 28% marginal rate.

Obviously there was no penalty if the family had only one income; in fact, for those increasingly rare households, there would be a marriage bonus.  If the sole breadwinner, under the old tax regime, were single, and that person was making $50,000, he or she would still have been subject to a 25% tax.  But if the breadwinner happened to be married, and moved into the “married filing jointly” category, his or her income would then have been taxed at a 15% rate.

2018 Personal Income Tax Rates
Rate Married Filing Jointly Single
10% $0 – $19,050 $0 – $9,525
12% $19,050- $77,400 $9,525 – $38,700
22% $77,400 – $165,000 $38,700 – $82,500
24% $165,000 – $315,000 $82,500 – $157,500
32% $315,000 – $400,000 $157,500 – $200,000
35% $400,000 – $600,000 $200,000 – $500,000
37% over $600,000 over $500,000

Source: Nolo.com

So how has this changed?  As you can see from the chart, the tax brackets for “married filing jointly” are exactly twice as high as the “single” brackets—up to the very highest brackets, when a marriage penalty finally kicks in.  A couple earning $50,000 each, under our current tax regime, would pay income taxes at a 22% rate, whether they were married or filing individually.

It gets a bit interesting at the highest two brackets, however.  As you can see from the chart, if two individuals were to make, say, $350,000 in any tax year, they would each fall comfortably into the 35% bracket.  However, if they get married, suddenly they must pay tax at a 2% higher rate (37%) for the first combined $100,000 they make over the $600,000 threshold.  It’s not a lot of difference, but there is clearly a penalty involved.

What about the stealth marriage penalty?  The new tax law sets a hard $10,000 limit on the amount that you can deduct for state and local taxes—including state income or sales taxes and property taxes.  That applies to individuals, and the same limit applies to households.  Single persons would get to deduct up to $10,000 for these various taxes, each, but when they get married, their deduction gets cut in half: only $10,000 for the household as a whole.

Of course, this only applies to people who would have significant state and local tax obligations—some states impose zero state taxes—so for some, there is no stealth marriage penalty at all.  To get up to where they have to worry about the marriage penalty, they would also have to join the 1%.

 

Thanks to Bob Veres for this guest content.

Filed Under: Blog Posts, Industry News

The Financial Nomad: Conserving Your Retirement Money by Becoming an Expat

October 13, 2017 By Guest Blogger

This post is by guest blogger Victoria Thompson, a U.S. expat who is excited to share her experience abroad in Argentina with others exploring the idea of living abroad.

In the wake of healthcare law changes, inflated premiums and rising housing costs, life in the United States can be a struggle. But if you’ve the free time and flexibility retirement affords, you might want to consider a move to another country — not only to save money, but for the adventure of a lifetime.

“But I can’t do that, I’ve got pets, grandchildren, responsibilities, health problems,” you protest.

I assure you, you can.

In the wake of a divorce in my 50s, the Great Recession, my son leaving for college, getting laid off, and massive changes to my professional industry (print publishing), my life resembled the spin-cycle of an overloaded Maytag. When my house had to be sold as part of a divorce agreement, I shouted to the universe, “You want to see change? I’ll show you some change!” I did what I felt was the only sensible thing: I moved to Buenos Aires.

“Madness!” you may think — but it was a calculated madness. The U.S. dollar was worth four times the value of the Argentine peso. My Minnesota winter was an Argentine spring. So, into a storage unit went the accumulation of 20 years of married life stuff, and onto a plane I stepped. I spoke no Spanish, but I had lots of free time, no responsibilities, and a cache of cash from selling the house. I’d planned on staying six months, with the option of a longer stay if I found the city agreeable and Buenos Aires would have me. The recession would be almost over by then, right?

If the idea of packing it all in and departing to lands unknown is appealing to you, here’s some hard-earned wisdom I’d like to impart:

Preparation

Research the countries that interest you, taking into consideration favorable exchange rates and quality medical care. A good site to begin reading is internationalliving.com. Many sites have discussion groups where you can ask question of expats already living there, and their assistance is invaluable. I used BAexpats.com a little before I left (and a lot when I arrived). I got help on everything from how to activate a Spanish-language cellphone to what bars showed American football. I used it to get invited to parties and to invite others to mine, and make a lot of new friends in the process.

Finding a Place to Live

You can arrange an apartment or house to rent online, but I wouldn’t recommend it. One needs to learn the neighborhoods, or “barrios” as it was for me. Photos are well and good, but sometimes don’t match up to the real life experience. It’s also good to meet your landlord so you know what kind of service you’ll receive. Airbnb or Vacation Rental by Owner are good options for a short-term stay while you hunt for a residence. In some countries where corruption is the norm, it’s helpful to bring an interpreter or friend with you as you visit rental agencies. I brought an Argentine friend to help me when looking for apartments. After we walked out of one agent’s office, she told me he bragged to his assistant (in Spanish) that he was planning to scam both the homeowner (and me) by skimming money off the top. He’d forgotten that my friend was Argentine.

It’s also helpful to know cultural and societal norms. In Argentina, to rent a dwelling for a year you need to pay a year in advance in cash, and have a citizen vouch for you to get a lease. Otherwise, you’ll pay tourist rates. I paid tourist rates. I found my home on Vacation Rental by Owners and because I was staying for six months, negotiated a lower rent. Educate yourself on how to negotiate a long-term rental. Once again, expat websites are your new best friend. Another option is renting a room in an established household. I have a friend who teaches English all over the world and she prefers to live in other people’s homes for the company. She’s become close to several families this way and still keeps in touch. You’ll learn more about the culture living in someone’s home, and it’s often much less expensive.

Medical Insurance

It’s important to understand the options for healthcare in the country you choose. In my case, the BAexpats site was very helpful as a research tool for choosing a health insurance company. For $100 a month, I purchased a comprehensive plan with no deductible and no copays. During my stay I needed a root canal and a crown, and it paid for those as well. I also had a full physical. As an American, the reasonable cost astounded me.

Social Connections

I made friends with my hairdresser, the guys who owned the cafe across the street, the two Argentine guys who owned the local expat bar, and the man who fixed my laptop, as well as friends and acquaintances from BAexpats. I went to a fabulous New Year’s Eve party at the former Russian Embassy, attended several “pop up” dinners, danced tango and hosted Thanksgiving dinner, Christmas party, and Australian Day parties at my home. I had a much more vibrant social life in Buenos Aires than I ever did in Minnesota, made even easier by being single.

Spend some time learning to understand the cultural norms around affection and friendliness where you go. Argentines are warm and outgoing generally, and the expat crowd — because they’re away from their homes too — are very easy to meet. If you’re moving alone, consider what the cultural norms might mean for your social life. (If people are generally more reserved and slow to make friends, are you okay with having a small social circle?) I’ve heard from other expats that it is difficult to make friends when people find out you’re only there for a finite time because they don’t want to make the social investment, but wasn’t the case for me.

Transportation

Being in a large metropolitan area with a subway, buses, trains, and cheap taxis made getting around without a car easy. You can always rent a car if you want to explore more of the country, but in my case that was unnecessary. I walked many miles every day — an excellent way to get to know the neighborhood. It also was the source of some wonderful memories: it’s while walking that I came upon the stunning Art Deco building, the surly French coffee shop proprietor who warmed up when asked about the vinyl records he’s playing, the pet store where puppies ran free and visitors were welcome to play with them.

Language

Because I spoke no Spanish, I prioritized finding a reasonably-priced tutor who came to my home three times a week. Most Argentines in Buenos Aires were not bilingual, even in the professional classes. And I never met one taxi driver who spoke English. But, with a little creativity you can get by. I always wrote my destination address on a piece of paper to give to the driver. It also helped that I’m also totally unashamed to make a fool out of myself: I once employed pantomime to act out the action baking soda takes when it’s incorporated into cookie dough (which I was attempting to make). As I swooshed my arms upwards in imitation of a chemical reaction, I gathered a small crowd in the store. People began shouting out their guesses to me. It felt like I was in a game show!

Putting it All Together

People often ask me “How did you find the courage to move to another country alone?”  The hardest part is adjusting your attitude. Once that’s accomplished, the rest falls into place.

If the country you choose is not what you envisioned, consider your options and context.

  1. Culture shock can be extremely difficult, especially if you’ve had a very monocultural upbringing or social context. Consider that perhaps you need to be there at least a year to acclimate to the culture or build social connections.
  2. If you’re certain this isn’t the locale for you, move to another country. If your stuff is in storage and you’ve tied up loose ends at home, you’ve nothing to lose. Spend some time figuring out what it is that was difficult for you, and research how those challenges might surface or fade away in other cultural contexts.
  3. Or simply go home. There’s no shame in that.

Thank you for reading about my journey. I’ll be starting a new one soon as I approach retirement age this year and prepare to move to Madrid. One expat experience usually leads to another. In my case, three friends from my stay in Buenos Aires are in Madrid, waiting to welcome me.

Filed Under: Financial Planning

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