Understanding Tax Terms: The Marriage Penalty
There are a lot of positive things about getting married, but the IRS’ marriage penalty isn’t one of them.
The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code.
The tax rate problem
After two people are joined in matrimony, you may think the income levels for their tax brackets would simply be double what they were when they were single. But that’s not the case: instead, the thresholds to move into a higher tax bracket are lower for married couples.
Example: As a single filer, Mr. Lonelyheart’s $90,000 income has a top tax rate of 25 percent, the same as his bride-to-be’s tax rate on her $75,000 income. After marriage, their combined income of $165,000 moves their top income tax rate to 28 percent. In this case, being married exposes some of their income to an extra 3 percent tax versus staying single.
Married couples also see personal exemptions and itemized deductions phase out faster than for single filers. These deductions begin to phase out when adjusted gross income is greater than $261,500 for single filers, but only $313,800 (versus an expected amount of $523,000) if you’re married filing a joint return.
These tax benefit phase-outs don’t just affect upper-income taxpayers. Even the earned income tax credit (EITC) phase-outs favor single over married taxpayers. A single mother of three can qualify for the EITC with income less than $48,340, while a married couple loses the EITC with combined income over $53,930. In this way, a married couple with $27,000 in income each are severely penalized when using the EITC when compared with staying single.
ACA piles onto the marriage penalty
The Affordable Care Act also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. 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.
Unfortunately, there are some couples who simply decide not to marry to avoid the marriage penalty. Obviously this option isn’t right for everyone. If you are planning to marry in the near future, don’t be caught by surprise with a larger than expected tax bill. Call to review your situation.