The Penalty of Marriage

It’s June, and what better time for love, weddings, and marriage penalties? Yes my friends, while you’re busy picking out flowers, caterers, and tacky bridesmaid dresses, start thinking about how much more tax you’re going to be paying, come tax time. That’s right, I said more tax, and if you’re in the majority of taxpayers, you’ll most probably wind up paying more tax as part of a married couple than you would as a single bachelor(ette). I wrote about this a couple of years ago, but a recent meeting with a new client reminded me of how often this subject has come up over the years, so I thought I’d revisit it.

You may or may not have heard of the term “marriage penalty”. What this refers to is combining two spouses’ incomes on one married tax return which will result in a higher tax than the same amount of income split between the two spouses on two single tax returns. In one of the more recent tax law changes within the last few years, Congress had attempted to eliminate the marriage penalty, but the problem is, they didn’t do it for all the tax brackets. For the lowest (10%) and next lowest (15%) tax brackets, the amount of joint income that falls into each bracket is exactly double the amount of single income that falls into each bracket. And that’s where marriage penalty relief ended. Taxable income for a single taxpayer in the next bracket (25%) falls between $36,250 and $87,850, while married joint taxpayers will find that bracket only covers income between $72,500 (double the single amount) and $146,400, (only 167% of the single amount). So if you have two taxpayers with taxable income of $87,850 each, they’ll both be in the 25% bracket, but add those up ($175,700), and on a joint return they’ll now be in the 28% bracket…penalty! For those in the uppermost tax bracket (39.6%), single taxpayers will hit that bracket with taxable income of $400K, while joint taxpayers will hit that bracket at $450K.

This may have you thinking “what about married filing separately?” Unfortunately, the answer is that the tax brackets are even less forgiving than the single ones, and you’ll be in the top tax bracket with only $225K of taxable income, compared to $400K single and $450K joint. There are reasons to file separately that are more legal and protective than tax saving (e.g. divorcing couples who want to keep their taxes/finances separate), and in my experience, in a majority of cases, filing jointly will be cheaper than filing separately, so for the happily married couple, filing jointly will probably be the best course of action.

There are limited ways to try to reduce the effect of the marriage penalty, but that wasn’t the goal of this article. The idea here is to make you aware that the marriage penalty is “out there”, so if you’re planning on tying the knot this year (or know somebody who is), when the dust has settled from the wedding, and the honeymoon is (literally) over, the next thing to think about is meeting with your friendly neighborhood CPA, and do some tax planning early, to help avoid a major tax headache next April 15th.

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