A Marriage Penalty Lingers In The Tax Code

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Aug 01, 2017

By Brandon Yuska, CPA Manager at Terry Lockridge & Dunn

In our June newsletter, I gave some tips on updates that might need to be made when you get back from the honeymoon. This month, we focus on the impact of the marriage penalty. The marriage penalty occurs in the tax code when you pay more tax as a married couple than you would as two single filers making the same amount of money. This occurs throughout the federal tax code.

The tax rate problem. If the tax tables did not differentiate between single and married, you could assume the married income required to move to the next highest tax rate would always be double that of a single filer. This is not the case.

As an example, when you are a single filer, income above $91,901 is taxed at 28%. When you file a joint return with your spouse, the 28% rate starts at $153,101. You will notice that the beginning of the 28% tax bracket for married couples ($153,101) is not twice the $91,901 amount applied to each of you when you were single. The outcome is an increase in tax on your combined income over what you would have paid individually.

Accelerating the phase-outs. Another example of the marriage penalty occurs in the acceleration of phase-outs of personal exemptions and itemized deductions for married couples versus single filers. These deductions begin when your adjusted gross income (AGI) is greater than $313,800 if you are married filing a joint return and $261,500 when you are single. Think the marriage penalty only impacts upper income? Even the Earned Income Tax Credit (EITC) phase-outs favor single taxpayers over married taxpayers. A single mother of three can qualify for the EITC with income less than $48,340, where a married couple loses the EITC with combined income over $53,930.

ACA piles onto the marriage penalty. In addition, under the Affordable Care Act (ACA) taxpayers can face a 0.9% surtax on wages and other earned income and a 3.8% tax on investment income. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry.

Not surprisingly, there are some couples who simply decide not to marry to avoid the penalty, but obviously this option is not right for all couples. If you are planning to marry, do not be caught by surprise with a larger than expected tax bill. If you would like a review of how marriage will affect your tax and financial situation, contact Brandon at byuska@tld-inc.com to set up an appointment.