This is my second post today stemming from conversations I had earlier this week, and the fact that this issue came up – like that of the margin tax – seems sufficient reason for a post about it.
So, is there a marriage penalty? Well, sort of. There is not a conscious policy to use the tax code to discourage marriage; instead, the marriage penalty describes an incidental phenomenon that is the result of our progressive tax structure.
Think back to high school physics and centrifugal force. Centrifugal force doesn’t exist; centrifugal force is what you think you feel when there is actually centripetal force. Similarly, the government is not penalizing you when you get married. It just feels like it.
Briefly described, the marriage penalty occurs when two people get married and pay more in tax together, filing as married filing jointly, than they would if they had remained single. What causes it? The higher tax is a result of the progressive tax structure of income tax rates in the U.S. While a complete explanation of marginal tax rates would flesh out the discussion, suffice it to say that the when a couple combines their incomes, they will often land in a higher tax bracket – the tax rate on their last dollar earned will be higher than the tax rate on the last dollar earned by either or both of them before they were married.
The marriage penalty has received much press over the years though, according to the Tax Policy Center, more couples receive a “marriage bonus.” This is to say that they pay less as a couple filing jointly, than they would if they each were filing singly.
Interestingly, the marriage penalty occurs when the spouses have similar incomes, but not when they have disparate incomes.
For example: in 2012, a wife has $65,000 in income. Her husband has $30,000 in income. If they were not married and were filing separately, he would incur a tax liability of $2,603; hers would total $9,843. Their total tax would be $12,446. However, filing jointly, their tax liability is $13,000, with a penalty of approximately $555. The penalty is .6% of their adjusted gross income.
What if they both had incomes of $65,000? Individually, they each carry a liability of $9,843, for a combined liability of approximately $19,685. Together, however, they have a liability of $22,100, with penalty equal to 1.9% of their adjusted gross income, when they are filing jointly and their incomes are exactly the same.
We could do this all day, but if you want to have some fun with it, the Tax Policy Center has a great marriage penalty calculator which may be found here: http://calc.taxpolicycenter.org/marriagepenaltycalculator/.
Good luck. And if you hear wedding bells, don’t run away for tax reasons; just talk to someone first so you know how many tax reasons you may have to consider.
Estate Law in Texas 