Are you so much in love with your partner that you decided to move in together? It could cost you. Although living together without getting married can provide some freedoms, there can also be significant financial drawbacks. The Cheat Sheet chatted with Colleen Carcone, a wealth planning specialist at TIAA-CREF, to learn more about how cohabitating can impact your money.
1. You may be subject to gift taxes
If you love to show your affection through gift giving, you may be in for a gift of your own from Uncle Sam. Each time you give a gift above the annual gift tax exclusion amount ($14,000 for 2015), you will have to file a gift tax return. Carcone says that over time this will lower the amount of your lifetime gift and estate tax exemption.
“There are tax implications to be mindful of as an unmarried couple. Each of us has a lifetime gift and estate tax exemption of $5.43 million, but this is an area which unmarried couples find themselves faced with particular challenges. Any gift that exceeds $14,000 made to any one individual in 2015 is considered a taxable gift for the IRS. As you make taxable gifts, you start to use up your lifetime exemption, reducing the amount that you can pass tax-free at death. Once your exemption is used, the transfer tax is 40%. There is, however, an unlimited gift and estate tax marital deduction, meaning, if you are married, you can give or leave any amount to your U.S.-Citizen spouse. So for an example, let’s say hypothetically that one [person] gave their significant other a $40,000 European vacation for his birthday. If this couple were married, the unlimited marital deduction would apply, therefore no gift tax would be due. However, if they were not married, this would be considered a taxable gift. In fact, if you are not married, every time you give your partner a gift of more than $14,000 in a year, you must file a gift tax return and this is deducted from your lifetime exemption,” said Carcone.
2. You’ll miss out on additional retirement benefits
One area where unmarried couples are at a disadvantage is when it comes to Social Security. Unlike married couples, they will not be able to benefit from their partner’s dependent or survivor benefits.
“Choosing not to get married has financial implications, especially when you own assets as a couple, give substantial amounts of money and gifts to each other, and plan to leave assets to each other if one passes away. For an example, unmarried couples are often at a disadvantage when it comes to Social Security benefits. Typically, Social Security benefits are awarded either based on your own earnings history or the earnings history of your partner. Unmarried couples are not eligible for their partner’s dependents’ benefits (which you get if your spouse qualifies for retirement or disability benefits) or their survivor benefits (which you get if your deceased spouse qualified for retirement). The benefits of marriage in terms of Social Security can be substantial, especially when there is a large income gap between the two partners.
Social Security is an element of retirement savings that is essential to protect one’s nest egg. Without it, unmarried couples have to seek other financial avenues to protect themselves and their partner for both unexpected events and the future. For example, you can designate your partner as the beneficiary of your retirement plan (e.g. 401(k)s or 403(b)s). Another strategy would be to increase savings in the short-term to replace the spousal benefits that your partner is not able to receive through Social Security. And speaking of retirement plans, your spouse, if you are married, will have more distribution options than a non-spouse beneficiary,” said Carcone.
3. You might pay more in taxes
If you want to lower your tax bill, you might be doing just the opposite by choosing to live together and remain unmarried. Those who choose the married filing jointly option may get more of a tax break, says Carcone.
“Another financial drawback of not getting married is that most couples will end up paying more in income taxes. For many, filing your income tax as married filing jointly would result in a lower income tax liability than if you had each filed as single. However, high earning couples may actually face the so-called “marriage penalty” in which your tax bill when you file as married filing jointly is higher than your combined liability if each of you filed separately. This is because certain features of income tax become effective at less than double the single rates for married couples. For example, the net investment income tax under the affordable care act will affect single taxpayers with more than $200,000 of modified adjusted gross income, and married taxpayers with more than $250,000 of modified adjusted gross income. The threshold is only 25% higher for a married couple, yet both of their incomes are combined for purposes of determining when the tax applies, and by combining their incomes for tax reporting purposes, they could be subject to a tax that one or neither would be subject to if filing individually,” said Carcone.
Looking on the bright side
However, it’s not all doom and gloom when it comes to cohabitating. There are some benefits of living together.
“Whether you choose to marry or not is an intensely personal decision. There are a number of pros and cons when it comes to either getting married or simply living together. One of the more obvious benefits for living together versus getting married is that the couple does not have to pay for a wedding. Another example is divorce – if a marriage doesn’t last, the financial cost of divorce can be enormous,” said Carcone.