What happens when the couple has a marriage penalty rather than a marriage surplus? Your "two doctors" example is likely to be close to a worst case rather than AAA-rated - things like the SALT deduction and mortgage interest deduction phase out just as fast for married couples as they do for individuals, and this severely penalizes marriages.
This is a great question - I abstracted out state taxes and non-standard deductions, but to your point the math changes significantly if you acknowledge them. Thinking about it, there'd even be geographic arbitrage with the SALT deduction for couples that moved after getting married. Even if it could make sense for the doctor couple with standard deductions, there's a correlated risk of higher income = less predictable taxes.
In theory we can solve this by calculating the payments from federal-only taxes assuming a standard deduction, but there really is a risk that it'll be less of a good deal for the couple than it seems.
You can salvage this by financing registered domestic partnerships rather than marriages. RDP income in community property states is split 50/50 between between federal returns, which can be very advantageous when the couple earns enough to be hurt by structural marriage penalties, but wouldn't make efficient use of the tax brackets as individual single filers. This is the arbitrage I'm proudest of executing (but wouldn't recommend it to others - it's a tax prep nightmare).
I had never even considered RDP/marriage arbitrage - I actually wonder if a tax firm could specialize in these types of complex state-level arbitrages and take a percentage of the savings. Maybe they already do?
What happens when the couple has a marriage penalty rather than a marriage surplus? Your "two doctors" example is likely to be close to a worst case rather than AAA-rated - things like the SALT deduction and mortgage interest deduction phase out just as fast for married couples as they do for individuals, and this severely penalizes marriages.
This is a great question - I abstracted out state taxes and non-standard deductions, but to your point the math changes significantly if you acknowledge them. Thinking about it, there'd even be geographic arbitrage with the SALT deduction for couples that moved after getting married. Even if it could make sense for the doctor couple with standard deductions, there's a correlated risk of higher income = less predictable taxes.
In theory we can solve this by calculating the payments from federal-only taxes assuming a standard deduction, but there really is a risk that it'll be less of a good deal for the couple than it seems.
You can salvage this by financing registered domestic partnerships rather than marriages. RDP income in community property states is split 50/50 between between federal returns, which can be very advantageous when the couple earns enough to be hurt by structural marriage penalties, but wouldn't make efficient use of the tax brackets as individual single filers. This is the arbitrage I'm proudest of executing (but wouldn't recommend it to others - it's a tax prep nightmare).
I had never even considered RDP/marriage arbitrage - I actually wonder if a tax firm could specialize in these types of complex state-level arbitrages and take a percentage of the savings. Maybe they already do?
What I really like about this post is how it gets at the heart of romance: federally regulated financial instruments
Someone is gonna start this