Marriage certainly offers a great number of advantages - government, medical and legal benefits, companionship, teamwork, family, stability, love, and much more. However, there are also ways in which couples can be penalized for being married. One common misconception is that married couples receive greater tax benefits than single filers or unmarried couple who file separate tax returns. In reality, depending on each individual couple's financial circumstances, the opposite may be true.
Conception of the Marriage Tax Penalty
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In 1969, Congress enacted the Tax Reform Act, which placed a "marriage penalty" on some married couples, which causes these couples to pay greater amounts of taxes than unmarried couples. In other words, when a husband and wife earn approximately the same amount of taxable income and file a joint tax return, the law taxes the income of the married couple at a higher rate than that of two single people filing two separate "single" income tax returns. The reasoning behind formation of the marriage tax penalty was to eliminate the tax advantages that a married couple enjoyed by filing jointly. It is also the natural result of our progressive tax system. When a person has a higher income, he or she pays a higher rate of taxes. As a result, a married couple will be subject to the tax rate of the spouse who earns the higher income.
Let's look at an example as to how the marriage tax penalty works. Assume that a couple is living together, but not married. Each person has an adjusted gross income (AGI) of approximately $50,000. In this case, each person would file his or her single tax return, and each partner's income would fall into the 25% federal income tax bracket. However, if these same two people were married and filing a joint federal income tax return, their combined income would place them in the 28% tax bracket, thereby causing them to pay more taxes than the unmarried couple making the same income.
In a study completed in 1997, the Congressional Budget Office (CBO) found that 42% of married taxpayers in 1996 paid more taxes filing joint income tax returns than if they had remained single. In fact, the married taxpayer in 1996 paid an average of $1,380 more in taxes than the unmarried taxpayer. Other married taxpayers, however, paid less taxes than their single counterparts, because the amount of their individual incomes varied so greatly. Therefore, it is the disparity in a couple's separate incomes that really determines whether the marriage tax penalty applies, or whether the married couple actually derives a benefit.
Legislation to Eliminate or Minimize the Marriage Tax Penalty
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In recent years, Congress has taken some steps to partially eliminate - or at least minimize the impact - of this tax penalty on married couples:
In the Economic Growth and Tax Relief Reconciliation Act of 2001, Congress added a provision to the Internal Revenue Code (IRC) that adjusts the ceiling of the 15% tax bracket for people who are married filing jointly to be equivalent to the ceiling of the 15% tax bracket for single people. This legislation virtually eliminated the marriage tax penalty for taxpayers whose incomes fall within the lower tax brackets.