Marriage for Tax Purposes

I spoke to a couple long-time clients yesterday on a year-end call, and it turns out they pulled the trigger and got married!

We had discussed how that would all work tax-wise earlier, but they weren’t sure about the timing. So now that they are official, we went through some of the math and how their joint situation is a bit different than their situations as single filers.

But it’s a wild world out there, and just by happenstance I came across this post earlier:

Source: https://x.com/Geiger_Capital/status/1866708331953602929

"Looking to marry someone with $1m+ of short-term capital gains (LA California) for tax savings (I have $1m+ in losses) and split the savings

I (unfortunately) lost a bunch of money this year with some risky gambles and have ~$1.2m of context of capital losses.

I would like to marry someone with very large ($1m+) short-term capital gains and split the difference on the tax savings.

I am proposing keeping ~40c for every $1 of capital losses I provided for myself and offering you the remainder (~10c or so, $120k context if you are at the highest tax bracket). The formal agreement can be formalized with a lawyer in relation to the marriage

Slight preference for females but open to males too (preference is just to avoid having to explain why I (straight male) married a man in the future).

Prefer if you are in the LA / Socal Area as that's where I'm located.

Marriage would need to occur before the end of end of this calendar year.

For clarity, despite the heavy losses, I'm not a total loser; make several hundred thousand a year, good job, etc. I'm not that 'risky.' If you're a serious suitor, we can discuss more.

Please DM or chat me with serious inquiries."

It may just be an internet joke, but let’s assume this is a serious proposal.

For the record: I think getting married for tax purposes is ludicrous.

But let’s walk through the tax math for a moment.

The user says he makes “several hundred thousand” per year. Let’s assume $200,000 in wages as a single filer along with the $1,200,000 in short term losses.

Capital losses from stocks and such are limited to $3,000 per year and the remainder carries forward into the future until either:

There are other capital gains to offset the losses, or

The losses are consumed at $3,000 per year

If this person never made any gains in the future, it would take 400 years to consume the $1.2m in losses. Not a great plan.

So $200,000 in wages and -$3,000 in capital losses brings the adjusted gross income (AGI) to $197,000. And as a single filer, the federal tax on that would be $37,440 and the California tax on that would be $14,331 (these are 2023 tax numbers). The total tax is $51,771.

Enter the marriage proposal.

Whoever would be on the other side of this has short term gains of at least $1,000,000. Let’s assume the minimum. To be as conservative as possible, let’s also assume that there are no other sources of income.

One of the things that people get confused about with short term capital gains is that they count at ordinary rates. What this means is that there is no tax break on short term trading.

Long term capital gains have a discounted tax rate of either 0%, 15%, or 20%, but short term gains get taxed at the same rates as any other type of income.

For a California single taxpayer with $1,000,000 of short term capital gains, the tax load would be:

Federal: $355,608 (including $30,400 in net investment income tax)

California: $104,330

Total: $459,938

Between the two filers their tax bill would be $511,709.

Now let’s say these two get married before the end of the year. Their combined income would be $200,000 in wages and a net capital loss of $200,000 of which $3,000 is deductible and they would be taxed at married filing jointly rates.

The tax situation on their combined income and their change in filing status would be:

Federal: $27,861

California: $10,341

Total: $38,202

This marriage strategy would save the couple $473,507.

Funnily enough, this kind of thing happens all the time in the corporate world. There are companies with either tax losses or tax credits that sell off shares or membership interests. If you want more information on that and have large tax liabilities, contact us for details.

Still, I personally would not get married for tax savings.