A guide to understanding the Marriage Tax Penalty.
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
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
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.
Additionally, the act increased the standard deduction for married taxpayers to twice that of the standard deduction for a single taxpayer. Finally, this legislation also increased the income phase-out for the Earned Income Tax Credit (EITC) for married couples by $3,000.
Similarly, in the Jobs and Growth Tax Relief Reconciliation Act of 2003, Congress maintained the previously enacted provisions to eliminate the marriage tax penalty for the tax years 2003 and 2004.
Next, in the Working Families Tax Relief Act of 2004, Congress further extended the previously enacted provisions relating to the marriage tax penalty for a certain number of years.
Still, unless Congress reauthorizes the elimination of the marriage tax penalty, the penalty will again affect married couples filing joint tax returns with equal or similar incomes. On the other hand, the result of all of this legislation has been to further benefit married couples with highly disparate incomes, so that they actually pay less in taxes than an unmarried couple.
Current Marriage Tax Penalty Provisions in Effect
Despite the legislation described above, some aspects of the marriage tax penalty still remain in effect today. For instance, although the marriage tax penalty was removed for taxpayers whose income falls within the 15% tax bracket or lower, the legislation did not address the plight of taxpayers whose income falls above the 15% tax bracket. Therefore, for taxpayers whose income falls into a higher tax bracket, a married couple will pay more in taxes than an unmarried couple earning the same income. While the maximum tax in the 15% tax bracket for a married couple is twice that of an unmarried couple in the 15% tax bracket, the same does not hold true for all marital tax brackets, thus creating an inequitable result.
Furthermore, certain tax credits are the same or lower for a married couple filing jointly as they are for a single taxpayer. For example, the AGI limit for a married couple is $110,000 in order for the couple to claim the full amount of the child tax credit. On the other hand, the AGI limit for a single taxpayer is $75,000 in order to claim the entire child tax credit.
Earned Income Tax Credit (EITC)
Another inequity in tax credits between married and single taxpayers exists with the income limits for the Earned Income Tax Credit. In the tax year 2010, the maximum income eligible to claim the EITC for a single taxpayer with no qualifying children was $13,460, whereas the maximum income for a married couple with no qualifying children was only $18,470. Likewise, the income limit for a single taxpayer with one qualifying child was $35,535, whereas the income limit for a married couple with one qualifying child was only $40,545.
Alternative Minimum Tax (AMT)
Finally, a married couple faces application of the alternative minimum tax more often, which results in the payment of higher taxes. Every taxpayer must pay the higher of the income tax or the AMT. Under the AMT, the first $175,000 of taxable income is taxed at a 26% tax bracket, and any taxable income above $175,000 is taxed at a 28% tax bracket. Therefore, if an unmarried couple was subject to the AMT, and each had a taxable income of $125,000, then each would be taxed at the 26% tax bracket. However, if a married couple had taxable income of a total of $250,000, they would be subject to the higher tax bracket. The same is true of the AMT income exemptions. For a single taxpayer, the income exemption is $48,450, but for a married couple, the income exemption is only $74,450.
Are We Headed for Change?
While Congress has taken action to eliminate or minimize some aspects of the marriage tax penalty, there are still provisions in the IRC that act as a penalty for married couples. In a progressive tax system, there is no way to completely eliminate the marriage tax penalty and maintain marginal tax rates that increase with income. Absent a major overhaul of the tax system as we know it, there is little change that Congress can or will completely abolish the marriage tax penalty.
This article was provided by Linda Lawrence, whose website, BackTaxesHelp.com, provides detailed IRS problem help guides to assist taxpayers in resolving various issues, including tips on how to handle tax evasion penalties, bank levies, tax liens and more. Her website also features a tax help blog that offers tax filing tips, tax savings advice, and news about the latest changes to tax law.