Taxes: Working Couples

All right, everybody. On the count of three, nonworking wives and hubbies get on a payroll.

Why would we want to do that? For years, government has penalized married couples who both work outside the home. The "marriage tax" ensured that hard work by both husband and wife would result in heavier taxation than if they were single.

But those days are over now (the marriage tax, that is; the abuse will continue as long as government growth is essentially unchecked in America). What happened? Well, 10 years after everyone else noticed the marriage-tax penalty, Congress moved to "correct" the situation. The result is that they've finally created enough incentives that it will pay for a mother not to stay at home if she'd rather be in the labor force; the same holds true for a father who's choosing between work for pay and staying home to raise the children.

I'm referring to the new deduction designed to lessen (but not remove) the impact of the marriage penalty. When lots of worthy couples began to throw big parties each December and get divorced, then remarry in January after they had filed their income-tax returns as single people, the drones in Washington finally noticed. For 1982, the new deduction amounted to 5 percent of the net "earned income" (interest and dividends, pensions and annuities, etc., don't count) of the spouse earning the least. Thus, if one spouse earned $10,000 and the other $15,000, then $500 could be deducted on line 29 of the Form 1040 in 1982 (5 percent of $10,000). Two people earning $30,000 and $35,000 respectively meant the deduction would be $1,500 (5 percent of $30,000), the maximum allowable.

And that little ditty goes up to 10 percent as of 1983. The most recent studies, conducted on early returns for 1982 taxes, indicate many couples are missing the deduction. If you did, file an amended return.

Even if the nonworking spouse is not a career person, there is reason to get on a payroll somewhere so that he or she can open an IRA (Individual Retirement Account). If at least $2,000 in net income is earned (that is, income after business or work expenses are subtracted), then each spouse can put $2,000 in an IRA, for a whopping $4,000 deduction from income (Form 1040, line 25 in 1982). The sickly alternative is a "spousal IRA," where one account operates for both husband and wife; the most you can contribute and deduct each year is $2,250.

A side benefit to be had when both spouses work is the child care credit if you have any curtain climbers. This credit is a percentage of what you spend on child care for kids under age 15 as a result of both parents working. It is figured on a Form 2441 and features a sliding percentage rate based on how high (or low) your adjusted gross income is. The figure, ranging from 20 percent to 30 percent, is multiplied times the amount you spent on child care, up to $2,400 if you have only one and $4,800 if you have two or more rug rats. The resulting amount is subtracted directly from the amount of tax you owe and can range from $480 to $720 if you have one kid only, or $960 to $1,440 if you have two or more.

Keep in mind also the general tax-free benefits to be gained from working a job: pension programs, life and medical insurance, paid vacations, low-cost meals, company cars, etc.

But considering only the tax breaks discussed above, a couple making over $85,600 in taxable income (putting them in the 50 percent tax bracket—an obscenity—in 1982), with the lesser-earning partner making over $30,000, would save $3,460 on their 1983 taxes. A couple earning a more-modest taxable amount—say the wife makes $15,000 and the husband pulls down only $2,000—could still save about $1,000 on their taxes (assuming $2,000 was spent on child care so the husband could work, and assuming that he opened an IRA and put $2,000 in it, which amount might be a gift from the wife if necessary).

Now these examples are extremely simplified and don't take into consideration myriad other factors, including the basic exemptions. So don't go telling your Tax Artist that Tim Condon said you could save "X" amount of money. All this is for illustration only.

Now, a lot of you are going to say, "Let's one of us pay a salary to the other for doing the dishes and then take the tax breaks." Sorry, the yahoos in Congress already thought of that one and specifically outlawed it.

So we'll all have to figure a way around it. One way is to take a simple seasonal job, such as gift wrapping at Christmas time or camp counseling in the summer. Another angle is for the spouse who owns his or her own business to incorporate and then put the other on the payroll (which is not the same as one paying the other directly; a corporation is a separate entity, and there are plenty of other reasons to make the move to incorporating). Or maybe the spouse looking for work could start his or her own business, which can be anything from babysitting to writing magazine articles or mowing your neighbors' lawns.

Speaking of which, keep your friends and neighbors in mind. Perhaps you could do some valuable work for them, and they might see fit to pay you $2,000 for it. Voilà! If you don't take any business deductions (who would want to, under the circumstances?), you've got just the right amount to put into your IRA. And possibly a child care credit, worth $40–$60 in reduced tax bite. You're in the gravy. (You won't get any marriage-tax deduction, by the way, because any IRA reduction reduces your "earned income" for figuring the marriage-tax break; a $2,000 IRA deduction will reduce $2,000 in earned income to zero.)

The IRS will of course attempt to label many such arrangements ineffective and possibly fraudulent. If you are doing real, useful work, they will get nowhere. Who is to say that we shouldn't get to know our friends and neighbors more and help them out with some honest work? For honest pay. Value-for-value exchanges, just like in Atlas Shrugged.

Just remember the IRA should not be with a bank, but rather with a brokerage house or the like, so that you can self-direct the account. Buy stuff like silver bonds, gold mining stocks, and so on—very good stuff, especially in view of the fact that all this is important to your retirement. After all, no one believes in the Social Security scam anymore.

Tim Condon is an attorney and tax specialist practicing in Florida.