The Marriage Penalty

June is wedding month.  When planning to marry, the happy couple has many things to consider.  Very likely, not on that list are the tax implications of their new tax status “married filing jointly”.  But perhaps they have heard of the “Marriage Penalty” as regards taxes.  Certainly, the decision to marry should not be based on US tax law.  But knowledge of the consequences is important for planning.

What is the Marriage Penalty?  The marriage penalty refers to higher taxes levied when a couple is married then the total of the taxes they would have paid as individuals.  In fact, filing a joint tax return can have a negative effect, penalty, or a positive effect, bonus, depending on the income and deductions for the individuals getting married.  Generally, lower and middle income individuals do not get hit with the penalty.  Higher income couples usually will pay more taxes filing jointly then if they remained single and filed individually. This occurs because the tax code is progressive, with marginal tax rates rising as income rises and because the tax brackets for married are less than twice the span of the brackets for single filers.   For 2013, the rates go up to 39.6%.  Remember the marginal rate applies to the income within the bracket. A married couple must file “married filing jointly” or “married filing separately”.  Married filing separately has the highest tax; the brackets are narrower than single status.  

If the couple’s combined income is below $72,500, getting married does not affect taxes.   If one of the couple is non-working and the other earns below $72,500, the taxes paid will be lower because of the extra exemption. When combined income is higher, however, the couple will be penalized, paying more taxes because they have been pushed into a higher tax bracket.

Income isn’t the only factor in the difference in tax calculations of married vs. single filers.  Deductions lower taxable income.  When filing individually, one taxpayer may choose to itemize while the other individual chooses to take the standard deduction, whichever requires paying the least taxes.  Filing jointly, they choose as a couple, and their deductions could end up lower than the sum of the deductions as individuals.  Additionally, at higher income levels deductions and personal exemptions are reduced and eventually phased out.  The thresholds are $250,000 for single, $300,000 for married.

Tax credits are also impacted by combined incomes which exceed qualification levels since some thresholds for married filing status are not double the threshold for single filing status. A taxpayer who qualifies for the Earned Income Credit can incur a hefty penalty if the couple’s combined income puts them over the limits for the credit.  Conversely, if the taxpayer marries a low income earner, they might qualify for a higher credit.

Another tax and another penalty.  In 2013, a Medicare surcharge tax is being levied for high income individuals.  A .9% tax will be charged for individuals whose income is above $200,000 and for couples whose income is above $250,000 and a 3.8% tax will be levied on investment income over those levels. Notice the couple limit is not twice the single limit.  Two people earning $200,000 each would not pay the surcharge if filing as single.  Filing married, they would pay a significant penalty ($1,300 - $5,700) depending on how much of the income was from wages or from investment.

What is the newly married couple to do?  Financial planning and tax planning is important to the success of the marriage.  A couple planning to marry should understand the tax implications of the new filing status.  A review of withholding is essential.  Update the W-4 with your employers to ensure adequate withholding.  Redo last year’s tax returns as if you were married.  Be prepared.  Don’t be surprised. 

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.