Have you ever heard someone refer to the “marriage tax penalty” and wondered what they were talking about? Married people who pay federal taxes in the United States are treated differently on their federal income tax returns. Although they have more options when it comes to filing status, they lose the ability to file as a single person. This sometimes results in what is known as the “marriage penalty.”On the flip side, some couples benefit when April 15 rolls around. When a married couple pays less taxes than they would have paid when they were single, this is known as a “marriage bonus.”Nonprofit tax policy research organization Tax Foundation reports that “marriage bonuses can be as high as 20 percent of a couple’s income, and marriage penalties can be as high as 12 percent of a couple’s income.” Generally speaking, couples who have very high or very low incomes suffer from penalties, while couples who have very different incomes benefit when they file as a married couple.
The Basics: Tax Brackets and Filing Status
The U.S. tax system is based on the idea that people with higher income should pay tax at a higher rate. Our tax laws implement this concept using a tiered tax structure known as “tax brackets.” For tax year 2016, there are seven federal tax brackets ranging from 10 to 39.6 percent of taxable income. It is important to know that only the money that is earned “within a particular bracket is subject to that particular tax rate.”
As an example, consider a person who files as single with a taxable income of $10,000. The first $9,275 will be taxed at the lowest rate of 10 percent; only the $725 that exceeds that threshold will be taxed in the next bracket up, at a rate of 15 percent. In this example, the person’s “marginal” (or highest) tax rate is 15 percent. As a person’s taxable income increases above the thresholds set in the tax brackets, his or her marginal tax rate increases. In an extreme case, a person with a very high level of income would be taxed at all seven rates.
Complicating matters further is that the amount of tax paid is significantly affected by what is known as “filing status.” The U.S. tax system includes four possible ways to file: single, head of household, married filing jointly, and married filing separately. It may go without saying, but single people cannot file in either of the categories for married people, and someone who is married cannot file as a single person or as a head of household.
One Possible Result after Marriage: More Taxes
Filing in either married category sometimes results in less favorable tax treatment. This is referred to as the “marriage penalty.” Taxation at a higher percentage rate is the main reason the word “penalty” is used.
For example, for the 2016 tax year, the marginal tax rates are the same for a person who makes $75,950 or less—whether that person files as single or married filing separately. However, when that person’s taxable income is above this amount, the rates increase for the amount exceeding that threshold. In general, the tax rate for single filers stays lower, longer. Here is an example for an individual with $80,000 in taxable income:
⦁ Single Filing Status: (10% of $9,275)+(15% of $28,374)+(25% of $42,350)=$15,771
⦁ Married Filing Separately Status: (10% of $9,275)+(15% of $28,374)+(25% of $38,299)+(28% of $4,050)=$15,892
In other words, the single person will pay $121 less on April 15th.
A Second Possibility: Less Taxes!
When a married couple pays less federal taxes than they would have paid filing as single people, this is known as a “marriage bonus.” Most of the time, people who receive a marriage bonus have very different levels of income. They also tend to be in the middle class. However, marriage tax breaks are not necessarily limited to middle-class filers. The Tax Foundation reports that they also come into play “for low-income couples with one child.” This is because they benefit from an increased ability to leverage the Child Tax Credit and the Earned Income Tax Credit.”
The Implications: Consider Your Options
Most people who want to get married do not change course because of how they think they will be taxed. However, in the past, many people believed that marriage necessarily lowered their tax bill. This is not the case. When tax time rolls around, the safest course of action is to run the numbers under all filing statuses available to you. If you need help, contact an experienced tax lawyer or accountant.