The "marriage penalty" of taxes in America - how does it affect you?
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Overwhelmed on tax day It is tax season again, and it seems that every year the tax code in America gets a little more convoluted. One thing in the tax code that has always annoyed me is something called the "marriage penalty". Basically, the penalty occurs when two people with similar incomes are pushed into a higher tax bracket once they get married and file jointly. Here is a little history on this phenomenon and how it could affect your wallet.
The marriage penalty was instated in 1969 because married couples paid less taxes than singles on the same amount of income due to the way income was split between a married couple. The way taxes worked back then was that a married couple's income was totaled and then cut in half, and each half was taxed as an individual. This means that a couple making $80,000 would be taxed as two individuals making $40,000, but a single person making $80,000 would be taxed at higher rates. So new tax tables were drawn up in 1969 that put married couples in a higher tax bracket than two single people with the same income.
Before President Bush's tax cuts, the marriage penalty was quite severe and penalized most married couples with two similar incomes. If you look at the Federal tax brackets in 2000, it shows that a single person making $26,250 to $63,550 was in the 28% bracket, while a married couple landed in the 28% bracket with $43,850 to $105,950 of income. This means that two people making $22,000 each would have been hit with higher taxes once they got married even if they had no additional income. Additionally, the standard deduction for a married couple in 2000 was $7,600 while the standard deduction for a single filer was $4,400. This means that a married couple would shield less of their income from taxation than two single filers if they took the standard deduction.
After the Bush tax cuts, the marriage penalty was lessened or eliminated for most middle income families. If you look at the 2003 Federal tax brackets you will see that a single filer making $28,400 to $68,800 is in the 25% bracket and a married couple making $56,800 to $114,650 is in the 25% bracket. Additionally, the standard deduction was changed so that a married couple has the same standard deduction as two single filers. The marriage penalty is still fairly obvious in the higher brackets of income, but it was greatly decreased for most married couples.
It is unclear what will happen to the difference between single and married tax brackets once the Bush tax cuts expire because the change to lessen the marriage penalty is supposed to also expire. President Obama did say that he will increase the tax brackets for singles making $200,000 and married couples making $250,000 or more, and this is a fairly good indication that he supports the marriage penalty. Imagine a successful couple making a taxable amount of $130,000 each. If they stayed unmarried they would be in the 28% marginal tax bracket, and they would not be affected by a tax hike since they make less than $200,000 each. However, if they got married they would be pushed into 36% marginal tax rate since their incomes would combine to be more than $250,000 and their marriage penalty is nearly $5000 a year based on 2009 tax tables. Granted, this couple would probably be able to afford the extra taxes, but they will probably be a little miffed about paying thousands of dollars more every year just because they are legally married.
On the flip side, the current tax system is advantageous to couples who have incomes that differ by quite a lot. For example, suppose one person makes $100,000 and the other partner makes $34,000. Then they would be currently in the 28% and 25% brackets respectively. However, if they get married their total income would put them in the 25% bracket together, and they would save hundreds of dollars every year. Because of the inequality, groups have argued that the current tax system supports an one income family and encourages women to stay at home.
Personally, I think that the IRS should just simplify the entire thing by taxing everyone as an individual based on their own individual income since they should not be discriminating based on marriage status. Some say that married couple get to save money by pooling resources so they should pay more taxes, but couples that live together get to pool resources, also. What do you think? Did you pay more or less taxes when you got married? If you are not American, does a marriage penalty on taxes exist in your country?
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"Granted, this couple would probably be able to afford the extra taxes, but they will probably be a little miffed about paying thousands of dollars more every year just because they are legally married."
Given the numbers you used, the couple in question would pay $800 more in taxes. Only the $10,000 over the magical $250,000 limit would be taxed at the 8% higher rate (assuming, unrealistically, that this couple doesn't take a standard deduction or have any itemized deductions - let's say that the $130,000 they're each earning is adjusted gross income and their salary prior to deductions is higher).
So each of them pays $400 more per year, yet they enjoy the financial benefits of marriage, such as survivor's benefits for Social Security and spousal health care coverage, both of which total well more than $400.
I'll take that "penalty" any day of the year.
The amount of the tax is not the point. I too am married and get SLAMMED with a marriage penalty each year. The point is that the government talks out of both sides of their mouth. Government always chants "family values, family values" yet they set up a tax structure that SPECIFCALLY says stay singe and keep more of your money. This needs to change. Married people shouldn't pay less than a single but the most certainly shouldn't be penalized. Frankly, if Obama's awful healthcare bill go through and Bush's tax reductions are let to expire. I am seriously going to consider seperations and just living together. It would save us +/- $20,000 dollars a year. Just putting that into an account with 2% interest would pay for both my kid's college AND leave money left over for many other things. This is TOTALLY WRONG to be taken advantage of like this.
Maria, your calculations are flawed. The penalty is in the thousands for my theoretical couple. Here is the math using 2009 tax tables:
For singles: 28% on the income between $82,250 and $171,550; plus $16,750
For married filing jointly: 33% on the income between $208,850 and $372,950; plus $46,741.50 - This 33% is rising to 36% under Obama's proposal for families making above $250,000.
Person A) $130,000 taxable . Single Tax = 16,750 + 0.28 * (130,000-82250) = $30120
Person B) $130,000 taxable. Single tax = same as Person A = $30120
Total tax if both are filing single = $60240
If they're married their total income is $260,000.
Married tax = 46741.50 + 0.36 (260,000-208850) = $65155.5
The difference is $4915.50, not $800 like you said. The Obama administration hasn't been very clear on how they will change the tax brackets so I am assuming that the brackets will stay similar to what it is now but only the couples that make above $250,000 will get the higher rates. Anyway, the hike is only 1.9% of this theoretical couple's income, but it is in the thousands of dollars. There are definitely benefits to marriage, but I just think that each individual should be treated equally in terms of taxation.
I think it would be safe to assume that if the tax hike is only going into effect for people making over $250,000 that the tax bracket would begin at... $250,000?
Even if we did go on the bizarre assumption that the bracket started at $208,850, the increase in the tax that they paid would not be $4915.50. 260,000 - 208,850 = 51150. 3% of 51150 is 1534.50. The 36% rate applies only to money made in that tax bracket- income falling under that threshold is taxed at a different rate. In reality, since only the income over 250,000 would be taxed at the higher rate, the difference would be an increase of $300.
The original story is misleading in that it also does not account for the graduated tax system. Please, please correct this. If we do not account for the graduated tax scale, someone making $208850 would currently net $139930.17 after paying $68920.83 at 33%, while someone making $208849 would net $150,371.28 after paying $58477.72 at the 28% tax rate. This is simply not the case.
The marriage "penalty" does exist in a slight manner, in that two people can have a PORTION of the their income taxed at a higher rate than if they filed separately since the married brackets are not just the single brackets doubled. But it is not nearly as severe as you make it out to be in the article. And your insistence on persisting with a flawed original assumption does no one any favors, and just undermines the entire argument.
The marriage penalty was "fixed," but the fix does operate under the assumption that married people will have a mortgage interest deduction and a child deduction. My husband and I don't yet own a home or have a child, so we do pay more taxes than we would as singles because we lack the deductions needed to even the score.
I would also note that a married couple will probably lose the student loan interest deduction because their joint income will push them out of eligibility, even if one or both of them might have qualified as individuals.
Married couples also phase out of the new first-time homebuyer tax credit at a lower income. The phase-out range is $75-95,000 for individuals, but $150-170,000 for marrieds. If it were truly equal, it would be $150-190,000.
My ex wife and I both had good paying jobs when we got married. We ended up paying thousands of dollars more after marriage, which made no sense to me. I can gain most of the financial benefits of marriage by living with someone. Sure, there were some legal benefits for being married, but we shouldn't have paid for them through higher tax rates on our incomes.
Gal
It gets more interesting when one spouse doesn't work.
When I got married, I made $40,000 and my spouse made $0 (student).
However, he had a free ride to college from the federal government because of his nonexistent income.
When we married, my taxes went DOWN. I always figured this was because as a couple, we made $40,000, while I as a single also made $40,000.
However, we lost all student financial aid. It appears that they viewed him as making $40,000, since that is what I made and we were now married. I never did the calculations, but we lost about $3000 per year in financial aid and I do not think my taxes were reduced by nearly that much.
I think taxes should be neutral - not encouraging behavior one way or the other. You can end up with some weird rewards once you change the way you calculate taxes based on someone's arbitrary status.
My husband and I ended up paying quite a bit more in tax when we married.
I used to break even, or at most owed below $150, my husband roughly the same (he took more witholdings, therefore got money back - had to explain the "tax free loan" he was making each year TO the government).
Now, even though we do have a mortgage, we still pay quite a bit in taxes - in the thousands (!) - and our mortgage interests and charitable donations don't touch the standard deductions. Our income didn't change, but we're getting royally screwed.
the amount of your tax return is not a good measure of your total tax burden...you should compare your total tax before and after your marriage. One of you may have been paying less in each paycheck throughout the year.
Great write up Xin, thank you for bringing this up.
My wife & I always joked that neither of us had to pay one penny back to the gov't at tax time until the first time we filed married jointly. When single, we both received refunds every year, then after marriage have had to pay each of our first 3 years of filing jointly.
It was not until this current tax season that we saw a refund again, and I'm not really sure why...nothing was different from the previous years (except the fact that we received a $1,200 check from the gov't last summer and now are getting over $1,000 back again now). Seems strange, hard to understand and as you mentioned...quite convoluted.
This coming year we should benefit greatly from the fact that we are now tithing to our local church, along with all our other deductions. Once again proving that following the Lord brings nothing but positive results!
DebtFREEk!
Marc, it is actually not nailed down in stone that the new tax bracket would start at $250,000. From what I heard it's just possible that the top two brackets are reverted back to the 2000 levels, and that would begin at $208k for married couples in 2009, and perhaps a little higher in 2010. Also, this article is not about how much more the couple would pay under Obama, it is about how much more they would pay once they get married. It is quite severe even at the current levels for higher income couples. In my calculations I did use the graduated scale, not a straight percentage.
What about the "penalty" that same-sex couples are subject to because they are *not* able to file jointly and are ineligible for many, many financial incentives because they are unable to get married?
This is a good article, but I think that this is also an issue that should be addressed. Frankly, I'm surprised that it wasn't mentioned at all.
I'm not sure joint tax return is available in Canada, but I have always been under the impression that marriage is beneficial when it comes to tax times. The way I understand it, in Canada, tax benefits arise when the two spouses have unequal incomes. And in that case, a transfer of non-taxable benefit (through contribution to our retirement or education savings - RRSP/RESP) can take place that shifts the income from one spouse to the other that would in effect, get one down a tax bracket.
The tax differences are really interesting. I am aware of two others (sorry I'm a bit off-topic here): 1) we don't get tax rebates on interest paid for mortgages (but in the Netherlands where I'm now, they do) and 2) our estate/inheritance tax is repealed, so one's estate is only subjected to sales tax upon death.
Another penalty that has slapped us hard after getting married last year was the inability to make a traditional to Roth IRA conversion (not contribution, conversion). If your income is $100,000 single or married combined, it's not allowed. Period. No sliding scale or tax penalty here. You have to jump through hoops to "undo" the conversion. Of course, nobody told me this when I made the conversion while closing out accounts (all this over a whopping $72). Only my tax software caught this. In fact, when I called my financial institution about it, they were clueless. It's a huge hassle and the married limit is just stupid and the government knows about it. If all remains the same, this dumb tax law is supposed to change in 2010.
Couldn't we just get rid of the INCOME tax all together and move to a consumption tax?
That way you're not penalized for being married or single, you're not penalized for working hard, but you contribute to society every time you make the decision to consume. If you're not consuming, you don't get penalized. It would also remove all the loopholes we have set up for folks and corporations.
never happen, it would put the IRS mostly out of business, ruin most accounts and be decried as unfair to the poor and working poor. It makes a ton of sense but, for that reason, it will never make it through our government.
Well, there was some thought about creating a VAT like they have in other countries. It would tax consumption and also production and distribution, but it would so at a fairly "fair" rate such that income tax rates could be reduced, though probably not eliminated. Also, because the rich are generally pretty smart about money, they would figure out how to avoid paying that consumption tax/VAT by either ordering things online, or getting things from outside the country/duty-free/whatever.
I'm actually still in favor of it, but I don't think it'll ever catch on in the States.
I agree with Jen and with Maria - same-sex couples are penalized way, way more than married folks when it comes to income tax, inheritance taxes, insurance and many, many, many other financial areas. It's a huge injustice. I'd gladly take the marriage penalty if I were able to lessen the financial burden that I pay by not being allowed to be married.
I recently read this: http://www.misformoney.net/2009/03/marriage-penalty-myth.html
It is hard to get rid of a marriage penalty without creating a marriage bonus for every married couple.
Making two people just file individual returns seems like an interesting and fair idea, but then you take couple A, who make 20k each, and couple B, where the wife makes 40k and the husband stays home (hehe). Couple B pays much more in taxes than couple A, yet as a unit, they have same income, so they think it isn't fair. is it? I don't know.
Our tax code is so convoluted in its attempts to be "fair"
I recently read this: http://www.misformoney.net/2009/03/marriage-penalty-myth.html
It is hard to get rid of a marriage penalty without creating a marriage bonus for every married couple.
We are actually hit by this even based on the census average calculations. In 2009 I made $75K and my wife made $100K. Our AGI was a bit over $160K. So while the census says that there is only 8% of the population that makes over $150K we're in it.
But my motto is "Life ain't fair" so we just suck it up and roll with the punches... I still take our income over the tax saving by being in a lower tax bracket any day of the week.
The only way to get rid of the marriage penalty/bonus is by having everyone file as an individual. And sure, families who make $20k-$20k would make out better than families making $40k-$0k split. And that would encourage dual income families over the stay at home mom/dad.
I got socked by the marriage penalty in 2002. We both witheld enough for a refund, got married at the end of the year, and then had $1500 due at tax time. Then the IRS threatens to penalize us if we under-withhold again. (We had both withheld at the normal rate for singles until we got married, and then switched to a higher rate when married, but it wasn't enough for the IRS.)
This convoluted system of taxing income doesn't make a lot of sense. I shouldn't need software to determine my tax liability. I favor a consumption tax.
What bothers me is the deduction for children paradox.
More children = more deductions or less tax paid.
More children = more government services used, ie: schools.
It is hard for a rational person to have not noticed there are already enough humans on this planet. Why does our government provide incentives to produce even more?
More children = more deductions or less tax paid.
More children = more government services used, ie: schools.
More children = more future taxpayers.
This is an incentive to procreate by the government and it certainly seems to be working...
Believe me, we aren't making money off our kids. We pay far more for our children's care than we get back in taxes (or in "free" services such as schools). The child tax credit simply takes into account that we have fixed expenses related to the care of another human being who is not yet self-supporting. You can also claim as a dependent your ill or disabled spouse, for instance.
Making children grow up in poverty is not an effective means of populations control. On the contrary, countries where children grow up in poverty have higher birth rates than affluent countries.
The 'marriage penalty' doesn't hit most people now and many people see tax benefits to being married. My wife and I are paying less or equal taxes now and our income is over $100k. If you're in the very highest brackets then you may get hit with a marriage penalty. But only 1-2% of Americans are in those brackets. Many more of us are not paying any supposed 'penalty'.
What country are you paying your taxes in? My husband and I also make over $100k and they tax are crazy.
The marriage penalty of taxes is #147 on my list of reasons why I don't want to get married even though I have a great long term boyfriend that I'd love to spend the rest of my life with... And the fact that we live in a community property state is reason number #148. Don't get me started...
Consider two single people one makes $26k a year and the other makes $110k a year. If they get married they'll save over $2k a year in taxes using standard deductions.
Single deduction + exemption = $8950
Married deduction + 2 exemptions = $17,900
Single:
Person 1 : $26,000 income, $17,050 AGI = $2,156 tax bill
Person 2 : $110,000 income, $101050 AGI = $22,272 taxes
Combined taxes = $24,428
Married:
$136,000 income, $118,100 AGI = taxes $22,213
Tax savings when married = $2,215
I am getting married very soon this year and not happy to hear that married couples get penalized just for being married. It doesn't make it sense!! We currently live together, pool our money together and expenses and each pay half and we make around the same amount. We've been filing seperately of course because we are not married yet. But come next year, it will be a different story. I think it is really unfair to couples who are married, with a mortgage and kids!! I thought those things were supposed to be tax deductions, not tax increases! What the heck is going on here? We have a house and no kids, but know a couple who has kids and doesn't really get that much of a break for it on taxes. I think this is awful. Do you have to file together when you're married or can you still file as an individual, but married? If you can still file seperately that would definitely be a recommendation to make because you will pay less taxes that way. It makes no sense to me as to why they are taxing a married couple as one, when each individual has a job and not just one of the individuals has a job in the marriage.
You are right Jim, and I did mention that in my article. If two people have very different incomes, then they won't have a penalty. Right now it really only applies to people who a) have similar incomes b) are in the 25% marginal bracket or above.
"Because of the inequality, groups have argued that the current tax system supports an one income family and encourages women to stay at home."
First I would like to say that I was offended that this article would promote sexism like this. Why would the woman have to stay home? I am a woman, and I have a six figure salary, which is roughly 4x my husband's income. Whatever happened to empowering women?
Hi Andrea, I'm not promoting sexism. I'm just stating a fact that some people argue that the current tax system is sexist.
The fairest tax method would not be to tax everyone as a single person (because that would harm spouses with disparate incomes), but to allow married people to choose whether they want to file together or as two single people. Then they could pick the method that benefited them the most, and it wouldn't influence their decision to get married.
What a novel idea. Maybe they could add a category to the tax form called something like, idk, "Filing Status". And there could be tick boxes where you could check off either something like "married filing jointly" or "married filing separately".
"Because of the inequality, groups have argued that the current tax system supports an one income family and encourages women to stay at home."
This is bunk. The current tax system simply encourages one *partner* to stay at home, not necessarily the woman. This is how it SHOULD work, as single-income families are more likely to have kids (future taxpayers) and raise the kids without support from the government (less burden on other taxpayers).
"The current tax system simply encourages one *partner* to stay at home, not necessarily the woman. This is how it SHOULD work, as single-income families are more likely to have kids (future taxpayers) and raise the kids without support from the government (less burden on other taxpayers)."
As if parents need to be penalized by the government in order to stay home with their kids? Most dual income families are not that way because they want to be. They are that way because they can't afford to raise a family with only one income. So, very frankly, I don't see why those families should be further penalized by having to pay more taxes.
And I am not clear on the connection that you seem to draw about double income families requiring more support from the government. It is the attempt to be self-sufficient (not rely on outside support) that drives dual earners to both work. Please check your assumptions.
The government does not appear very capable in completing the tasks that are its main priority. It has failed to protect the country from internal/external dangers, failed to end the wars, failed to prevent the bank-crises, failed to protect its resources (human and environmental). Perhaps, rather than attempt to meddle in the private affairs of how families should be comprised and managed, the government should try to narrow its scope and simplify the codes by which it governs. In this way, with greater focus and concentration, it could perhaps succeed in using less (taxes, human capital, natural resource) and creating more (an enduring peaceful safe country that we can be proud of).
If there is no name change, address change or w4 change, how would IRS be aware of a marriage status change? Not marking the correct status box is tax fraud, but how do they detect it? Neglecting to report a marriage to the SS, doesn't change benefits, but could be a mess if survivor benefits become an issue. Just curious.
Your IRAs and similar accounts that send reports to the IRS track your marital status because it affects your contribution limits. And a marriage is entered into the public records, so the IRS can readily search this info. Believe me, they have a stake in knowing whether you are civilly married or not. This isn't something you want to fudge. As you say, it's fraud.
This is pointless. What is the average income of the average US citizen in a given year? Is it even close to 100,000 dollars? Maybe I run in different circles but, I don't know a single person who makes over 200,000 dollars a year and I don't know a couple who tramples 250,000. But, I'm just a college educated guy who works with other college educated guys and gals who have families. All who live comfortably on their meager wages that don't touch these numbers. Maybe I'm just dumb. I've been single and in my late 20's and early 30's paying more than my married coworkers for years and wondering what is up with the breaks. Apparently, I don't know what I'm doing with my return. I do know this much, I have no kids and very little burden on society. I do pay an equal amout as my married counterparts and my money goes to schools, healthcare and programs to support our nation's youth yet, I have 0, yes ZERO children. Yet, my money goes to educate and support them. Ok, they are the future. Is there any chance parents will be held responsible for their upbringing? Not likely, they have to work to support them. But wait, I don't have kids, I pay taxes that go to schools so that these kids have books, then go to a store where they have a drive to raise money so kids can have books. I just came to buy 900 rolls of toilet paper so I don't get stranded again, because I live alone with no kids and they need more money after I gave a kid ten bucks for a one dollar candy bar so they can have a football program at their school. Didn't I read that my taxes went up to support public schools? Again, I'm probably misinformed. I'm sorry to learn that the American who is barely getting by on their 200,000 dollar a year income pays more in taxes while the average income in the whole country is a 40,000 dollars a year. Finally, there are no examples shown for any argument by anyone. Has anyone who has responded to this article so far laid out any concrete numbers? I stopped reading after a short time. I know this for a fact, I have owed 50-100 dollars prior to a student loan deduction. The refunds I have received were based upon how much interest I paid on my student loans. But overall, I have never overpaid my taxes which means more money in my pocket and more importantly, in an account that pays more interest than the IRS. I'm pretty sure they pay zero interest. At the end of the year, my coworkers with children have lots of plans for their returns, which are a lot more than mine have ever been. So what is that about? They make just as much as I do? We make the same amout of money. We do the same amount of work. They have kids which count as a deduction. I don't have kids. I don't get a kid deduction. So what now? Are kids a burden or a choice? A siamese twin is a burden and do siamese twins get two wages? Do they get a tax break or do they have to pay a couples combined wage? They do live together and won't ever leave each other, unless this whole universal health care thing gets off the ground. Or maybe, in the end, you realize that the only people who are wasting your money are the people that we vote for and continue to misrepresent us all.
Regardless,
This conversation is redundant since the tax "question" has yet to be revised under
the soon to be distant congress.
Who knows "what" will be in place when the lame ducks leave, and what will
be revised when the new congress comes into power.
I agree with you Xin, there is great disparity and penalty within the current system
in its past/current formulation. They should not penalize marriage or success.
By doing this, the Government simply encourages dishonesty.
IMHO
Phill
The married penalty does not exist. A married couple can chose to file individual returns any year they choose. The simple math reflects a couples disparate income benifit and/or shared common expenses benifit as reasons to choose the joint return and pay less tax. Joint returns are not mandatory.
The wealthy pay more in tax.
The benifit of being rich far outweighs the added tax.
I just wrote this same thing as well. Much ado about nothing insightful.
This is all income dependent...many people see marriage benefits based on lower tax brackets when combining income if one person makes considerably more than their spouse. You can also file married filing individually which avoids the conversation altogether. My advice is get another accountant.
@Guest and George,
Filing 'married filing separately' doesn't help, it's not the same as filing single. See an accountant or buy TurboTax.
I think all single people should get together and sue the government for discrimination. I'm single I make $55,000 a year, I know a married couple that makes the same amount and they still pay less taxes then I do. The government goes after companies that discriminate, so why don't they go after themselves.
No one has mentioned the AMT marriage penalty as well, The minimum income limit fro a single person for the AMT is $112,500 but for Married couples it's $150,000. So in addition to the standard screwing over that married high income double earners receive you may also be hit with the AMT tax that you wouldn't have if single.
If there is anything about our income tax system that makes sense- anything- I haven't seen it yet. I'm a big fan of a federal sales tax replacing the convoluted tax mess we have currently. But I don't see that happening any time soon. Congress wants to be able to cater to special interests (and themselves) with special loopholes and tax breaks. Sales tax is the only equitable and fair tax there is. The more you make, the more you spend; the more you spend the more tax you pay. Exempt unprepared food, and we are good to go. Fair is fair.