The Marriage Penalty: A Hidden Tax Burden for Married Couples
When Erin Antler got married, she and her husband realized that their joint tax return would cost them several thousand dollars more than if they were two single people. They were not alone. According to the Congressional Research Service (CRS), roughly 37% of married couples pay more in taxes than they would as singles. This phenomenon is known as the ‘marriage penalty.’
The tax code is designed to account for the difference in income between two married individuals by doubling the size of most tax brackets for married couples. This is intended to prevent one spouse’s income from being unfairly taxed at a higher rate. However, this system was designed with the assumption that one spouse would be the primary breadwinner, and it still rewards this setup best.
For couples with similar incomes, the widening of tax brackets doesn’t provide much benefit. However, for couples with a significant income disparity, the marriage bonus can be substantial. The CRS found that about 53% of married couples pay less tax because they are married, earning an average bonus of $4,911. On the other hand, about 37% pay more, with an average increase of $1,820.
So, what’s behind the marriage penalty? Two main rules are to blame: the head of household filing status and the Earned Income Tax Credit (EITC). The head of household filing status provides a bigger standard deduction for single parents, which can lead to a higher tax bill when they get married and file jointly. The EITC, on the other hand, is a tax credit for low- and middle-income workers that disappears once income reaches a certain threshold. When a couple gets married and their income increases, they may lose access to the EITC.
The worst hit by the marriage penalty are couples earning just $75,000, with two kids and no mortgage to deduct. For them, the tax bill is higher than it would be if they were two single people. The top bracket, which starts at $640,600 for a single filer but only $768,700 for a couple, catches about one million of the 55 million couples who file jointly, resulting in an additional tax bill of up to $10,250 per year.
So, what can couples do to minimize the marriage penalty? The IRS treats couples as married for the entire year if they get married on December 31, so it’s essential to do the math before picking a date. Combining last year’s two returns and using the total income to model the tax bill on a joint return can help couples decide whether to get married or file separately. However, filing separately can still result in losing the EITC and other tax benefits.
Why You Should Care About the Marriage Penalty
The marriage penalty may seem like a minor issue, but it can have a significant impact on couples’ finances. By understanding the tax code and how it affects married couples, couples can make informed decisions about their financial planning and minimize the marriage penalty.
