Understanding the Marriage Penalty
What is the marriage penalty? It refers to additional income tax paid by married people. It usually refers to federal taxes, although some states have a this so-called penalty too. But not all married people have to pay this penalty. And when only one spouse is working, it is questionable whether a marriage penalty even exists — and some would say that such couples have a marriage bonus instead.
In the examples below we use the 2009 tax rates, thresholds, etc. to help you understand where the marriage penalty folks are coming from.
No marriage penalty at lower incomes
Due to the the standard deduction ($11,400 per married couple in 2009), standard exemption ($3,650 per adult or child in 2009), the child tax credit (up to $1,000 per child in 2009), and other deductions and credits, many couples pay no tax at all. For example, a family with two kids and household income of $50,000 would have have a net deduction of $26,000 – standard deduction $11,400, plus exemptions $3,650 times 4 or $14,600 – and thus taxable income of just $24,000. According to the tax tables, the tax is $2,769. After the child tax credit of $1,000 per child, the net tax is just $769. In 2009 the IRS had the making work pay credit, so if both spouses were working, they would have received a credit of $400 each, and their net tax would have been zero. In fact, the couple would have received $31 from the IRS. In other words, they would have got a refund of all federal taxes withheld in their paychecks, and would have received an additional $31. There are other deductions and credits such as the IRA deduction, mortgage interest deduction, property tax deduction, new car sales tax deduction in 2009, adoption credit that could reduce or eliminate your tax bill.
Since the marriage penalty only arises if you actually owe tax, it will affect higher income taxpayers, or lower income taxpayers without kids.
Even so, at lower incomes, there is still no marriage penalty. Prior to the Bush tax cut passed in 2001, there would have been a penalty because the standard deduction for married couples would have been around 1.5 times the single deduction or $8,550 in 2009, as opposed to double the single deduction or $11,400 that that same year, making more of your income taxable. When the Bush tax cut expires, the standard deduction for married filers will revert to the smaller value (about 1.5 times the single deduction), but it is expected that Obama and congress will keep the current value (that is, double the single deduction).
Let's compare two single people making $25,000 each, with no kids. Each has a standard deduction of $5,700 and exemption of $3,650, for a total deduction of $9,350. The taxable income is $15,650 and tax according to the tax tables is $1,934. After the making work pay credit of $400, the net tax is $1,534. Their combined tax is double that or $3,068.
Now suppose the two single people in our example above get married. What does that do to their taxes? They now have a standard deduction of $11,400 and net exemption of $7,300 – exactly double the standard deduction and exemption for single filers. Net deduction is $18,700, taxable income is $31,300, and tax is $3,864. After the making work pay credit of $800 because both spouses are working, the net tax is $3,064. The net tax is actually slightly less than the net combined tax in the above paragraph, and thus it looks like there is a marriage advantage. However, this slight discrepancy is due to rounding error in the tax tables (specifically, according to the tax tables the tax is the same if your taxable income is any amount between $25,000 and $25,050). The combined tax of two single filers, and one married couple at this income level are essentially the same, and there is no marriage penalty.
However, had their standard deduction been less when they got married (as was the case before the Bush Tax Cut of 2001) — namely about $8,500 instead of $11,400 — they would have about $2,900 more in taxable when they marray, which translates to about 15% or $435 more in taxes.
Second, let's consider two single people making $75,000 each. The standard deduction is $5,700 and exemption is $3,650, and thus the net deduction is $9,350. Taxable income is $65,650 and tax per the tax table is $12,606. After the making work pay credit, the net tax is $12,206. The combined tax is double or $24,412. Now let's suppose that the people are married. The taxable income is doubled to $131,300. The tax is $25,200, and after the making work pay tax credit of $800, the net tax is $24,400. Still no marriage penalty.
Marriage penalty due to losing the EITC
What we wrote above is not entirely true. Taxpayers with lower income may still see marriage penalty due to losing the earned income tax credit (EITC). The EITC is a tax credit to help taxpayers with very low incomes. As you earn more your EITC rises, but as your earnings rise further your EITC phases out. According to the 2009 tables, the maximum EITC is $5,657 (if you have three children), and when your earned income is above $48,279 your EITC is zero. The EITC is less if you have two kids, one kid, or no kids.
Let's compare two people making $25,000 each, each with one kid. From the 2009 tables, each taxpayer gets a credit of $1,668.
But when the taxpayers get married, their combined income is $50,000, and they lose the EITC. That's a combined loss of $3,336.
Marriage penalty at higher incomes
Third, let's consider two single people making $100,000 each. The standard deduction is $5,700 and exemption is $3,650, and thus the net deduction is $9,350. Taxable income is $90,650 and tax is $19,109. There is no making work pay credit at this high income. The combined tax is double or $38,218. Now let's suppose that the people are married. The standard deduction is $11,400, the exemption is $7,300, and the total tax is $39,028 (the making work pay credit is not available). So by getting married, the couple's tax burden has increased by $810 ($39,028 minus $38,218).
The reason for the marriage penalty above is in the tax brackets. The 10% tax bracket ends at $8350 for single filers, and double that or $16,700 for married filers. So no marriage penalty. The 15% tax bracket ends at $33,950 for single filers, and double that or $67,900 for married filers. Still no marriage penalty. But the 25% tax bracket ends at $82,250 for single filers, and at $137,050 for married filers, whereas double of $82,250 is $164,500. Stated differently, two single people, each with taxable income of $82,250 would be in the 25% tax bracket. But a couple with combined taxable income of $82,250 times 2 or $164,500 would be well into the 28% tax bracket. That's why the tax is higher.
In other words, when both spouses are working and have a combined income of over $137,050, they're likely to be hit by the marriage penalty. In big cities such as San Francisco and New York, both spouses often work and both have incomes higher than $100,000. So they're likely to encounter the marriage penalty.
For the most extreme case, look at the highest tax bracket. It is 35% for incomes over $372,950, for both single and married filers. If a single filer had a taxable income of exactly $372,950, they would not be in the 35% tax bracket – only the next dollar of income would be taxed at 35%. But married filers with an income of double that or $745,900 would find that half of their income is subject to the maximum 35% tax. In detail, a single person with taxable income of $372,950 would have a tax bill of $108,216, and two such single people would have a combined tax of $216,432. But if the single people got married, they would have joint income of $745,900 and would have a tax bill of $231,427. This is $14,995 more than two single people because half of their income is taxed at the maximum rate of 35%. In 2011, after the Bush tax cuts expire, the 35% tax bracket is expected to rise to 39.6%, and thus the marriage penalty will be even greater.
When only spouse is working, it is debatable whether the marriage penalty applies. Suppose someone was making $200,000 and they got married. If their spouse does not work, their tax bill will decrease. Some call this a marriage bonus. But the tax will still be more than half of what it was before marriage; it will be closer to 3/4 of what it was when the person was single. Some might argue that the tax should be exactly half of what it was, thereby resulting in an even larger bonus.
And it would have been exactly half in California. There is almost no marriage penalty in the California tax code.
Further marriage penalty at even higher incomes
As your income rises further still, you encounter more forms of marriage penalty. For example, the itemized deduction and exemption are phased out faster for married filers than for single filers. In addition, the alternative minimum tax (AMT) arrives sooner for married filers because the AMT exemption is less and is phased out faster.
Fourth, let's consider two single people making $150,000 each. The standard deduction is $5,700, the exemption is $3,650, taxable income is $140,650, and total tax is $33,102. There is no AMT. The combined tax is double or $66,204. Now let's suppose that the people are married. The standard deduction is $11,400, but the exemption is reduced $7,300 from $6,327. When your income is very high, your exemption is reduced, but as you can see in this example it is reduced faster for married folks – the single filers in this scenario did not see their exemption reduced. Taxable income is $282,273, and total tax is $70,971. Included in the total tax for married filers is $163 of AMT (alternative minimum tax), which reflects the fact that when your income is this high, you are not allowed part of your exemption and itemized deductions. But the single filers in our example did not have AMT.
Below is a list of some of the ways the marriage penalty creeps in. The list is by no means comprehensive, but it does cover the major sources of the marriage penalty as well as a few less known ones. Remember that the tax rates and thresholds depend in the table below are based on the 2009 tax code.
|Tax brackets||The upper limit for the 10% and 15% tax brackets are double for married filers as compared to single filers, so no marriage penalty. But the 25%, 28%, 33%, 35% arrive sooner for married filers.
|AMT||The alternative minimum tax (AMT) arrives sooner for married filers. The AMT exemption controls how much of your income is subject to AMT — the higher the number, the less of your income is subject to this tax.
|Itemized deduction phase out||For both single and married filers the itemized deduction starts to phase out when your income is $166,800. So married filers, whose joint income is likely to be greater, will face the itemized deduction phase out out sooner. (Note that you always get 20% of your itemized deduction, and some line items of the itemized deduction are never phased out.)|
|Exemption phase out||For single filers the exemption is phased out when your income is above $166,800. But for married filers the exemption is phased out when your income is above $250,200 (whereas twice $166,800 is $333,600).|
|Capital loss deduction||For both single and married filers the capital loss deduction is $3,000. Thus two single people will be able to deduct $6,000 in losses, whereas when they marry they can only deduct $3,000. (Don't worry though, because unused capital gain is carried forward indefinitely.)|
|Social security||For single filers, if your modified income is less than $25,000 then none of your social security income is taxable. But for married filers, the threshold is $32,000 (whereas twice $25,000 is $50,000). In addition, married filers are more likely to find that all of their social security income income is subject to tax.|
|Rental loss deduction||For both single and married filers the rental loss deduction is phased out if your income is over $100,000. (Don't worry though, because unused rental loss is carried forward indefinitely.)|
|Self-employed health insurance deduction||The IRS has a provision that if you're self-employed, then your health insurance premiums are only deductible as an adjustment to income (on page 1 of 1040) if you could not have been covered by your spouse's health plan at work. So single self-employed people always get the deduction. But if you're married and your spouse could have added you on their plan at their work, even if they chose not to, your health insurance premiums are not deductible as an adjustment to income. (They are deductible as an itemized medical expense deduction, but that is useless to most people.)|
|Prior year safe harbor||For both single and married filers, if your prior year income is $150,000 or more you must pay 110% of the prior year's taxes to be within safe harbor (safe harbor means that you don't have to pay a penalty for not paying enough tax). But if a single person or couple makes under $150,000 in the prior year, they only have to pay 100% of the prior year's taxes. Thus, two single people making $100,000 will only have to pay 100% of the prior year's tax to be within safe harbor, but if they marry they will have to pay 110% of the prior year's tax.|
|Home buyers credit||For homes purchased on or after November 7, 2009: For single filers the credit starts to phase out if your income is $125,000 or more. For married filers the credit starts to phase out if your income is $225,000 or more (whereas twice $125,000 is $250,000).|
|Obamacare medicare tax on earned income||As part of Obamacare (Patient Protection and Affordable Care Act), starting in 2013 there is additional medicare tax on the salary and self-employment income of high-income earners. For single filers, salary income above $200,000 is subject to 0.9% medicare tax. But for married filers, joint salary income above only $250,000 is subject to the tax. Thus two single people making $200,000 each will not have this tax, but upon getting married about $150,000 of their now combined income will be subject to this new Obamacare medicare tax because they're considered to have higher income.|
|Obamacare medicare tax on investment income||As part of Obamacare (Patient Protection and Affordable Care Act), starting in 2013 there is additional medicare tax on the investment income of high-income earners. For single filers, all or part of the investment income is subject to a 3.8% medicare tax when the total income is above $200,000. But for married filers, the 3.8% medicare tax kicks in when total income is above only $250,000.|
|California mental health tax||The mental health services tax is a 1% tax on income over $1,000,000. If two single people were working and making $600,000 each, there would be no mental health services tax. But when they marry, $200,000 of their income becomes subject to this tax.|
|California safe harbor for residency||California has a rule that if you're a resident but out of the state on an employment contract lasting at least 546 days and your income is less than $200,000, then you're treated as a non-resident (and so you don't need to pay CA tax). But the $200,000 limit is the same whether you're single or married.|
No advantage to married filing separately
One might think that couples can avoid the marriage penalty by filing married filing separate returns. However, this makes no difference because the married filing separate thresholds mirror the married filing jointly thresholds, not the single thresholds. In addition, on married filing separate returns you don't get the benefit of various credits such as the dependent care credit, nor is it likely that you can contribute to a Roth IRA. Married filing separate returns might be better if one spouse makes much less than the other, there are lots of itemized deductions, and/or you live in a non-community property state.