By: Stephanie Lee, East Rock Financial Services
Couples often ask about the financial effects of a marriage or California Registered Domestic Partnership (RDP). While people get married or registered for romantic reasons, the union has significant legal and financial effects. East Rock encourages clients to discuss these ramifications with each other before deciding whether to marry or register.
Because the laws are constantly changing, East Rock strongly recommends clients meet with a family-law attorney and a CPA to get the latest updates and personalized advice; this document is not complete, and each couple may have specific issues. A one-hour consultation with each professional should be enough time to gather relevant information.
Purpose of Marriage or RDP
Consider the reasons you are thinking of marrying or registering. What do you want to accomplish by this act? In whose eyes do you want your relationship to be affirmed and acknowledged? Some possibilities:
- In the eyes of each other: This can be achieved by affirming your commitment to each other privately or with witnesses.
- In the eyes of family, friends, and community: Couples may have weddings and commitment ceremonies to celebrate and formalize their relationship before their loved ones.
- In the eyes of a religious institution: This may be very important to some couples and unimportant to others.
- In the eyes of the state government: In California, RDP has rights and responsibilities within the state (not at the federal level) that are identical to that of marriage. With validation in the state’s view, however, comes a legal contract that may or may not fit your relationship dynamics.
- In the eyes of the federal government: This occurs automatically for couples who marry in any of the 50 states or overseas. As with the state government, a marriage valid to the federal government has legal and financial effects.
For most of human history, only items 1-3 were used for a couple to be considered married. Only in the last 100 or so years have the government’s “eyes” been a factor in a relationship. In recent history, we have tended to merge item 2 (in the eyes of the community) with 4 and 5 (in the eyes of the state and federal government). By separating the two, a couple can affirm their commitment and decide what type of legal contract suits their relationship dynamics.
Marriage and Registered Domestic Partnership in California
These are some of the financial and legal ramifications:
- Community Property: All future earnings from your efforts, but not investment income or inherited assets, will be considered both of your property. All future debt will be considered shared. Previous assets and debt are separate but could easily become mingled. For example, depositing a salary to an account that has separate, pre-marriage property could make the entire account community property. The mortgage on a house owned by one partner before the marriage could become shared debt upon a refinance. A lawsuit resulting in a settlement or judgment against one spouse will be owed by the second spouse. Check with an attorney for how out-of-state property is affected.
- Inheritance: A spouse/RDP gets automatic rights. In the absence of a will, the spouse/RDP can petition to stay in the shared home and get an allowance. The spouse/RDP has first rights to her half of the community property and to the deceased’s half of community property. For the non-community property without a will, the spouse/RDP would usually get up to half and possibly more if there are no surviving children, parents, siblings, nieces or nephews. Even if married or an RDP, a will and trust ensure that your wishes are followed.
- Public Benefits and Scholarships: Once married or registered, the couple’s combined income may disqualify one for public benefits or scholarships that based on financial need.
- Employee benefits: While many companies give domestic partners the same benefits as legal spouses, other companies do not. Health benefits for domestic partners are subject to federal tax, whereas spousal health benefits are not. This tax can be more than $100/month. Some employers reimburse employees for this tax. Check with employers to see what effect a marriage/RDP has on benefits.
- Advance Health Care Directives: In the absence of a health directive, a partner could have difficulty getting access and making decisions for the other in a health emergency. Getting an Advance Health Care Directive can solve this. Keep in mind that a spouse may not be the most clear-headed person to make health decisions in a time of stress.
- Insurance: Some insurance rates may be lower for a married couple.
- Divorce or Dissolution: While all of us hope our relationships will last forever, it is a possibility that they will not. Those who have gone through the divorce process often say they will never marry again, simply because of the legal hassle. Divorce is more expensive, more complicated, and takes more time than breaking up an unmarried/non-RDP relationship; however, the rules can protect a person’s living standard. In California, a divorce takes at least six months, and sometimes years. The law provides standards for dividing assets in divorces.
- Spousal Support: In case of divorce and in the absence of an agreement, the court may order spousal support in any relationship where there is a significant disparity of income. The court can overrule a pre-nup if denying spousal support is “unconscionable.” The general rule is that spousal support lasts for half the length of the marriage or RDP, but it can be longer if the relationship lasted over 10 years. Many factors can be taken into consideration to determine the duration and amount. The payer gets a tax-deduction for spousal support, and the income is taxable to the recipient. Spousal support can be ordered temporarily during divorce proceedings.
- Parentage: If married or an RDP, the name of the non-birth parent can be put on the birth certificate; parentage is presumed. The child can then immediately be added to the health plan of either parent. If unmarried, a biological father can sign a voluntary Declaration of Paternity to be recognized as the father. Without marriage or an RDP, a non-biological parent must adopt. Even if married or an RDP, a non-biological parent may want to adopt the child to preserve parental rights and the child’s inheritance rights. Adoption may be cheaper if married or an RDP.
- Medicaid: Qualifying for Medicaid can be affected by the healthy spouse’s resources, but the spouse also has some protections for which assets can be kept.
- Property Transfers: Transferring title between spouses or RDPs does not trigger a Proposition 13 property-tax reassessment.
Marriage Under the Federal Government
- Taxes: Marriage could raise or lower the couple’s federal tax bill. Many aspects of the marriage penalty were eliminated in late 2017.
- Low Earners With Children: the limit to get an earned income tax credit is $41,756 (in 2020) for a single person with one child and $47,646 for a married couple. Two single people each earning $40,000 would lose the credit if they married.
- High Earners With Similar Income: Couples who both have high incomes and jointly earn between $622,050 and $1,036,800 in 2020 will pay higher taxes if they marry. The 37% bracket starts at $518,400 for single people but $622,050 for married filing jointly. A couple in which one has a high income and the other a low income could have a lower combined federal tax liability. Being an RDP could lower the combined tax bill if the couple has differences in income; however, in some scenarios the combined taxes could be higher. Because there is no set answer, check with a tax consultant or run the two scenarios through tax preparation software to find out the results in your case. Tax laws are constantly in flux.
- Net Investment Income Tax: As of this writing, this tax has a steep marriage penalty for two high earners. For a single person, the tax is applied if Modified Adjusted Gross Income is $200,000 or higher. For a married couple, the tax applies after their combined income is $250,000.
- Mortgage Interest Deduction Limit: The mortgage interest deduction limit of $750,000 on purchases made after Dec. 15, 2017, applies to either a married person or a single person. Therefore, two legally single people can deduct $750,000 each, for a total of $1.5 million. If they were married, they would be limited to $750,000 between the two of them.
- SALT Deduction: This is an itemized deduction for state and local taxes, including property taxes. The limit is $10,000 per single person but only $10,000 for a married couple. At this writing, legislation has been proposed to make the deduction limit $20,000 for a married couple.
- Inheritance: Your legal spouse can inherit an unlimited amount from you without incurring estate tax liabilities.
- Social Security: A spouse is entitled to 50% of the other spouse’s Social Security payments. This is relevant if your benefits would be lower than 50% of your spouse’s. You need only be married one year before being eligible. Divorced spouses qualify for the benefits if the marriage lasted at least 10 years and the claimant remains unmarried. Widows and widowers may claim 100% of their deceased spouse’s benefit at Full Retirement Age if the marriage lasted at least nine months and the deceased qualified for Social Security benefits. A widow or widower re-marrying before age 60 loses survivor benefits.
- Immigration: Marriage can ease the immigration of a foreign partner. Check with an immigration attorney for the latest laws pertaining to your situation.
- Property Transfer. Transferring property between spouses, during marriage or upon divorce, does not trigger tax consequences in most cases. For example, a transfer exceeding the annual gift tax limit is not subject to the gift tax.
- Divorce: At the federal level, divorce is a non-taxable event. For example, a Qualified Domestic Relations Order (QDRO) can split up a 401(k) without incurring taxes for a divorcing couple that was legally married.
- Spousal IRA: A non-working spouse can contribute to an IRA if the working spouse has earned income exceeding the amount contributed. Depending on income, this contribution could be tax-deductible.
- Medicare Rates: Medicare has a steep marriage penalty if the couple files taxes separately. In 2020, rates were based on 2018 income. If each person in a couple earned $87,000 in 2018, their Medicare rate would be $462.70 each per month if they were married filing separately but only $202.40 each if they were single. The penalty disappears if the married couple files jointly for household income under $750,000.
Before marrying or registering as domestic partners, a couple should consider the legal and financial ramifications. If the contract that California enforces on a marriage/RDP does not fit the relationship dynamics and wishes of each person, the couple should consider a pre-nuptial agreement with the terms they want. In essence, every couple who marries signs a pre-nup: the question is whether the marrying couple writes the contract or whether the state legislature does. Pre-nups have long been seen as unromantic, but they could instead be viewed as taking control of the terms in a relationship; marriage and RDP otherwise cede a couple’s control of their relationship to state and federal laws, which are themselves subject to further modification by lawmakers, voters, and court interpretations. Couples can also have a wedding or ceremony and choose not to register or legally marry, perhaps keeping this decision private.