If you are a newlywed, you may be in for quite a surprise during tax season. Why? Well, the first time you file taxes together, as a married couple, you may be hit with a marriage tax penalty. In other words, you may end up paying more taxes together then you did separately. Although this tax has been modified and regulated throughout the years, it still impacts millions of American couples today. If you have questions about the marriage tax penalty or you wonder how the tax will be applied – you have come to the right place. This post will help you better understand the marriage tax penalty and what it can mean for you and your spouse when you file your taxes.
What is a marriage tax penalty?
So what exactly is a marriage tax penalty? Well, it is a tax that affects married couples when they file taxes together. In other words, a marriage tax penalty occurs when spouses (filing jointly) pay more income taxes then single individuals. On the other hand, a marriage tax bonus occurs when spouses pay lower income taxes together then they would if they were not married. More couples experience marriage tax bonuses then marriage tax penalties, but the exact totals are unavailable at this time. A progressive tax rate (a rate that is based on the income level of the couple. The higher the income – the higher the tax rate) and state/federal taxes determine whether or not a married couple (a single tax unit) will receive a penalty or bonus.
In some cases, combining the couples’ two incomes can lead to higher tax rates then if the incomes were taxed separately. Marriages, in which spouses have comparable incomes, are more likely to experience a marriage penalty. On the other hand, marriages where only one spouse works or one spouse makes more than the other, have a higher chance of receiving a marriage tax bonus. Contrary to popular belief, a marriage penalty is not restricted to income taxes. In fact, a married couple may receive lower government benefits than those who are single.
How did this tax originate?
Between 1913 and 1969, many married couples experienced numerous benefits when it came time for tax season. During that period, it was better to be married then to be single when filing income taxes. Many single income tax filers complained that the “income-splitting” tax code was discriminatory towards those who were not married. In 1969, a tax hike was levied towards married couples who filed jointly in an effort to even the playing field for single income tax filers. In 1993, taxes were increased again for married couples – making it undesirable to “get married.” Once again, in 1997, married couples took another tax hit. It is important to note that between 1969 and 2003, spouses who earned approximately the same income (causing them to be in the same income bracket), incurred a heavy marriage tax penalty. During this time, married couples received marriage tax bonuses only if one of them did not work or made significantly less than the other one. In other words, if one spouse made a good salary and the other one did not, there was a higher chance of receiving a bonus rather than a penalty.
Although, the marriage tax penalty tended to hit middle income earners the hardest, it also affected married couples in all income brackets. For example, a couple, regardless of income level, could lose benefits that they received individually before they married. In 1996, the average couple paid approximately $1,500 in marriage tax penalties (Congressional Budget Office, 2014). During that time, the “marriage penalty” affected approximately 40% of all married couples. Over the years, more and more couples have chosen not to marry based on the marriage tax penalty. In 2003, the Jobs and Growth Tax Relief Reconciliation Act redefined the tax rate for married couples who chose to file their taxes together. New tax legislation restricted marriage tax penalties and increased marriage tax bonuses for couples filing jointly.
What should I take into consideration, if I plan to get married?
If you plan to get married, you should take into consideration that you and your spouse may incur a marriage tax penalty. This is especially true if you and your spouse earn a similar income. On the other hand, if one of you does not work or one makes a significantly higher income than other, you may receive a marriage tax bonus, therefore paying less in taxes than someone who files as a single individual.
What is a common misconception associated with the marriage penalty tax?
The most common misconception associated with the marriage tax penalty is that married couples can file their tax returns, either jointly or separately. While this is true, it is important to note that if you and your spouse decide to file married, but separate, you will not receive the same tax rate as a single filer. In some cases, if you are married and file separately, you may incur more taxes than if you filed your taxes jointly. According to the Tax Policy Center (2014), more and more couples have started to file their tax returns together rather than separately because of this fact.
Dr. R. Y. Langham
Bell, K. (2013). Married taxpayers get some temporary tax relief. Bankrate. Retrieved from http://www.bankrate.com/brm/itax/tax_watch/20010209a.asp
Sit, H. (2009), Marriage tax penalty and unit of taxation. The Finance Buff. Retrieved from http://thefinancebuff.com/marriage-tax-penalty-and-unit-of-taxation.html
Tax Policy Center. (2014). Marriage penalty. Retrieved from http://www.taxpolicycenter.org/taxtopics/Marriage-Penalties.cfm
U.S. Joint Committee on Taxation. (2000). The Marriage Tax Penalty Relief Act of 2000. Retrieved from http://www.jct.gov/x-3-00.pdf