Just tied the knot? Uncle sam might be very pleased because he'll have his hooks into $50,000 more of your income this year.
How can this be, isn’t marriage and family supposed to reduce tax liability, especially among the middle-class. Not so. Here’s how it works. As a single tax payer you have up to a $25,000 passive activity loss that can be taken against rental properties which can offset your regular income from another job. This passive activity loss can include all the regular repairs, taxes, depreciation, mortgage interest and other allowable losses that most investors rely upon.
This passive activity loss offsets standard income dollar for dollar. So for instance if you work at a real-estate firm and earn a paycheck for $75,000 per year and have $25,000 in losses on your investment properties, your taxable income sheds the $25,000 and becomes $50,000. If your soon-to-be married partner has a similar job and similar losses, they earn the same benefit for a combined taxable income reduction of $50,000.
The meat and potatoes: This penalty doesn’t affect everyone, but does affect many middle-class tax payers. The day you tie the knot, combine your total income and refer to the following chart. For every two dollars above $100,000 in income, the IRS removes $1 in passive activity loss credit, illustrated here.
Combined income exceeds $150,000: Full $25,000 tax penalty for each partner.
Combined income exceeds $125,000: $12,500 tax penalty for each partner.
Combined income below $100,000: No tax penalty.
Unfortunately, like so many others, this tax law was not indexed for inflation and the dollar has been devaluing (inflating) faster than ever. Therefore in the past this might have only affected high income couples, but today affects many more, and tomorrow will affect everybody including the lower income classes.
I’ve discussed this with numerous CPAs who do have an opinion on this IRS penalty. The IRS has no incentive to fix this broken law because it means more and more income for the IRS. How to avoid this penalty? Either don’t have any passive activity losses, or don’t get married if either of your singular income is below 100k currently, and when combined it goes above 100k.
For full details on this penalty and all the rules behind passive activity losses, review the IRS publication here: http://www.irs.gov/pub/irs-mssp/pal.pdf
---
Nathan is a member of Rentec Direct who provides property management software, tenant ach payment processing, and Rentec Direct's tenant credit, criminal, and eviction screening.
Comments(3)