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Financial Factors to Weigh Before Cohabitation or Marriage

Here are 7 financial factors you should think about before moving in with your sweetheart.

By Joseph Mateja

The decision about whether to move in together or marry depends on numerous factors, not the least of which are financial.

Either way, pooling your money in a two-income relationship can be a convenience, resulting in saving on living expenses, paying off debts faster and building your collective savings. But how much do you agree on financially? A shared mindset is important for the long-term success of the living relationship or marriage. We all know the history of how money differences disrupt couples and can cause them to go their separate ways.

Joseph Mateja is an investment adviser representative for Rooted Wealth Advisors. He specializes in life insurance, retirement planning and business 401(k)s. He has worked in the financial industry for 12 years and has certifications from the Series 6, 26, 63 and 65 exams.

Joseph Mateja

Some couples decide, whether they’re marrying or not, to keep their finances separate. They may agree to contribute to certain expenses, but the rest of their individual income is up to their own discretion. Other considerations when deciding between marriage, cohabitation or living separately include the potential advantages of filing joint versus separate tax returns as well as being covered by the other person’s employee benefits, which may or may not be offered to domestic partners.

If you’re thinking about getting married or cohabitating, it’s important to discuss these things with your partner. You also may want to consult with a financial professional, both on your own and together. One thing you need to keep in mind, no matter how optimistic you are about your relationship: what if it doesn’t work out? What are the financial ramifications then?

Whether you decide to marry or not, you should both get up to speed on where and how to invest, and whether or not to designate each other as beneficiaries on investment accounts and insurance policies. Here are some other scenarios to think about:

Combine expenses – but not all finances – when cohabitating.

When an unmarried couple lives together and each partner works, combining household expenses and covering them together makes sense. Set up a monthly budget including those household bills, such as rent, utilities, and food. But if there’s a significant disparity in monthly income between partners, say $500 to $1,000 or more, it’s fair to allocate shared household expenses based on the percentage of income each makes, rather than by equal amounts.

Other expenses such as each person’s individual obligations — car loan, insurance, student loan, credit cards, etc. — should be kept separate and paid by the person owning those bills. That approach allows each person to protect their credit. Combining finances can get complicated. An advisor can help you understand many of the ramifications of combining finances and provide questions to ask each other that you may not consider on your own.

Taxes: Marriage penalty or bonus?

The infamous “marriage penalty” narrative is that a higher tax bill sometimes comes when a dual-income couple files jointly with the IRS, versus filing as separate individuals. But in other cases, being married can yield a tax bonus, where couples pay fewer taxes as a result of their marital status. This is particularly true for couples with a stay-at-home spouse, or when there’s a large disparity between the couple’s individual incomes and combining them on a joint return perhaps pulls down some of the higher earner’s income into a lower tax bracket.

However, couples with one or more student loans may have to pay a higher monthly minimum if those borrowers are subject to a repayment plan based on their earnings. For example, if you get married and file a joint tax return, your spouse’s income will be included in the calculation of how much you owe. This could result in a substantial hike in monthly student loan payments. One option may be to file separately, but then you’d lose out on the tax benefits of filing jointly.


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Too much debt: A potential deal-breaker.

Couples considering marriage may see the debt of one or both partners as obstacles too high to overcome without causing major stress. This is especially true if one partner brings significantly more debt than the other. But it may provide some comfort to know that whatever debt was acquired before the marriage stays with the original debtor and is not extended to the new spouse.

However, too much debt by one or both partners could hurt when applying for a loan, such as a mortgage. Also, be aware that debt accumulated after the marriage is considered shared debt in community-property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin).

Health insurance implications.

When you’re married, the IRS doesn’t tax your health benefits, nor the benefits your spouse receives under your company plan. But if you’re providing your domestic partner with health care benefits, the portion applying to that person could be taxable to you. So if each partner’s employers pay for health coverage, they’re better off keeping their policies separate.

Financial protection.

There’s more financial protection built into a marriage than when two people live together unmarried. If you divorce, a court or legal agreement divides the assets. Each party has some protection and a chance at equitable distribution of the marital assets.

But when two unmarried people living together split up, the legal procedure to divide assets isn’t as clear-cut. A non-spouse would have no inherent right to the other person’s assets. The exception to the rule is the few states that allow common law marriage.

Renting when your partner buys.

Unmarried couples thinking about living together should strongly consider the ramifications of one person owning, and the other one renting from the owner/partner, in case the relationship doesn’t work out. For example, if one partner buys a house, presumably the other can pay rent toward the mortgage (rent they would otherwise pay to live separately). However, the renter not only has no rights to the home equity being earned but also lacks the protection of a lease agreement.

In other words, if the couple breaks up, the non-owning spouse is obviously the one who will move out, but there should be some agreement as to how long the renter can stay there while looking for another place to live. The homeowner, on the other hand, may struggle to meet mortgage payments without that extra rent money.

When unmarried partners buy a house together.

The house belongs to the person whose name appears on the legally recorded deed, so make sure both parties are named on the deed. Joint tenancy with right of survivorship and tenancy in common are the two basic ways of sharing a title with other people. If both partners apply for the mortgage, both are responsible for paying for it even after a breakup. If both are on the deed as owners but only one is on the mortgage, that person remains responsible for the mortgage even if he or she has moved out.

From a financial perspective, the best way forward is for couples to discuss their concerns, obligations and financial goals openly, honestly and frequently. Whether they decide to marry or cohabitate, a good relationship is built on communication and trust.

About the author: Joseph Mateja

Joseph Mateja is an investment adviser representative for Rooted Wealth Advisors. He specializes in life insurance, retirement planning and business 401(k)s. He has worked in the financial industry for 12 years and has certifications from the Series 6, 26, 63 and 65 exams.