Brett Arends’s ROI: The crushing financial penalties for marriage in your later years — courtesy of Uncle Sam

These are the implications of “Preferencing Nonmarriage In Later Years,” by law professor Richard Kaplan, the Guy Raymond Jones Chair in Law at the University of Illinois.

He highlights two key areas of elder finance where a couple is often better off unmarried than married: Social Security and nursing-home care. As these are two of the most important financial issues facing all elders, the argument about elder marriage — or elder divorce — may be more than academic.

On Social Security, Uncle Sam started taxing benefits in 1983. As Kaplan points out, the taxation system is so “bizarre” (his word) that taxes are higher on a married couple than on an unmarried couple with the exact same finances. That’s because Social Security taxes kick in at two thresholds, and in both cases, Kaplan says, “the applicable threshold for a married couple is less than twice the threshold for an unmarried person.” 

The first income threshold is $25,000 for a single person, and $32,000 for a couple. The second threshold is $34,000 for a single person, and $44,000 for a couple. That means two unmarried people living together with incomes of $25,000 apiece will end up paying no Social Security taxes in retirement. They won’t even hit the first threshold. But a married couple with income of $50,000 blows through both thresholds and ends up paying tax on 85% of their benefits.

“The current income-tax structure pertaining to Social Security benefits makes nonmarriage the law’s preferred status on this important and widely applicable issue,” Kaplan writes.

This isn’t the only way the taxation of Social Security takes on a bizarre character. The taxes were introduced in 1983, under Alan Greenspan’s plan to “save” the system. As noted before, these are double taxes, because you pay into the Social Security system with after-tax dollars. So your contributions are subject to income tax, and then the benefits are subject to income tax as well. They get you coming and going, as the expression goes.

(Compare and contrast with the treatment of billionaire hedge-fund managers and private-equity managers, who have once again escaped having to pay regular taxes on their often-vast incomes.)

Meanwhile it’s also worth noting that the income thresholds at which you start paying Social Security taxes weren’t even indexed for inflation. They were introduced in 1983 as taxes on high earners only. Ask yourself if a retired couple today with a total income of $32,000 is high earning.

But if the marriage penalty for Social Security taxes looks strange, it pales compared with the treatment of married couples when it comes to paying for nursing-home care. The average nursing home now costs about $110,000 a year per person. Many people still think Medicare will pay for them to stay in a nursing home, if they end up needing to. As Kaplan points out, it won’t, except in very narrow circumstances (such as skilled nursing care for a couple of months after discharge from hospital). The only federal program that will pay for nursing-home costs is Medicaid, and it will only do so once you have spent nearly all your own assets and income and are effectively broke.

Here’s the twist. When it comes to making sure you’ve spent nearly all of your own assets first, Medicaid will consider a married couple as a unit, but an unmarried couple as two separate people.

So if, say, Bill and Betty are married, and Bill has to go into a nursing home, Medicaid will demand the couple run through nearly all their money — Betty’s as well as Bill’s — before it starts chipping in.

“As a married person, some of Betty’s income might be required to pay for Bill’s nursing-home bill,” Kaplan writes. “If Bill and Betty were not married, however, none of her income would be subject to this mandatory contribution requirement.”

Naturally there are some allowances — the Medicaid law is not to render Betty destitute — but they are not extensive. They generally include the primary residence if the spouse is still living there; a single car; a prepaid burial plot; and something called the “Community Spouse Resource Allowance,” or CSRA, which varies from state to state, rises to a maximum of $137,400, and is supposed to be enough for the remaining spouse to live on.

“There is no concept comparable to the CSRA for couples who are not married, and accordingly there is no limit on how much an unmarried partner can keep,” Kaplan writes.  

He continues: “Assume that Bill in the preceding example has $100,000 in financial assets beyond the ‘exempt resources’ … while Betty has $600,000 of such assets. Assume further than Bill needs to apply for Medicaid long-term-care benefits, so his and Betty’s combined nonexempt resources are $700,000. In this case, all of those assets would need to be spent on Bill’s care until only $137,400 (at most) remains. But if Bill and Betty were not married, Bill would be required to spend down his $100,000 to $2,000, while Betty’s $600,000 of financial assets would be completely unaffected.”

To add insult to injury, after Bill dies, if the couple is married, Medicaid can come after Betty to help defray Bill’s nursing-home costs. They can even come after Betty’s estate after she dies. But not if they aren’t married.

It’s not entirely a one-way street, as Kaplan admits. Marriage has its legal benefits, even in your senior years. But in many cases, such as estate planning and healthcare power of attorney, you can replicate some of those benefits through legal documents and smart planning — even without tying the knot.

Marriages are made in heaven, goes the saying, but they are lived here on Earth. Sadly, Uncle Sam doesn’t make the latter any easier when you’re older.