One peculiar aspect of American tax law is that getting
married can dramatically affect a couple's total tax bill. Many
couples, especially those in which one person earns the vast
majority of the couple's income, benefit from the tax treatment
on married couples. But many others, especially two-income
families where each spouse's earnings are roughly equivalent, can
end up paying a whole lot more in tax -- a phenomenon known as
the marriage penalty.
tax compromise that lawmakers agreed to
at the beginning of 2013 made several substantial changes to the
tax laws, and a few of those changes actually made the marriage
penalty worse for some couples, especially high-income couples
where both spouses work and have considerable income. Let's look
at these three provisions and how much they'll boost the marriage
penalty's impact in 2013 and beyond.
1. The new Obamacare tax.
Obamacare created two new taxes
: a 0.9% tax on wages and other earned income for high-income
earners, and a 3.8% tax on investment income. For both taxes, the
threshold is $200,000 for single filers and $250,000 for married
So if two single people each earned $200,000, they wouldn't be
subject to the Obamacare tax at all. But if they got married,
then $150,000 of their total income of $400,000 would get taxed,
with an additional tax liability of $1,350. Similar situations
with investment income could lead to a much larger marriage
penalty, as the investment tax rate is more than quadruple the
rate for wages. Investors in dividend-oriented
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2. New high-income tax brackets.
marriage penalty has existed in tax brackets
for a long time. The bottom two tax brackets don't include a
marriage penalty, as they're designed so that the amount of
income married couples can earn is exactly twice what singles can
earn to stay within a given bracket. But for the 25% tax brackets
and above, the married brackets kick in at far less than twice
the single amounts, with the 35% bracket kicking in at exactly
the same amount for singles and couples.
The tax compromise created a new 39.6% bracket that kicks in
for high-income taxpayers. The way the law was drafted, that
39.6% rate applies to single filers making more than $400,000 and
joint filers with income above $450,000. What that means is that
if two unmarried people each make $400,000, they won't be subject
to the new provision, with taxes topping out at 35%. But if those
two people get married, then an additional $350,000 in income
will get taxed at the higher rate. In this example, a couple
would pay more than $16,000 in additional taxes solely because of
the marriage penalty in the tax brackets.
Similar provisions affect capital gains tax rates, with a
higher 20% maximum rate applying above the income threshold
compared with 15% below it. With the
having set record highs during the past week, capital gains could
be substantial for those selling off or rebalancing holdings in
3. Reductions in itemized deductions and personal
The tax compromise brings back provisions that reduce the amount
that high-income taxpayers can deduct for personal exemption
allowances and on itemized deductions. Again, the thresholds at
which these provisions kick in include a marriage penalty, with
singles above $250,000 of adjusted gross income and couples over
$300,000 not being able to reduce their taxable income by the
full amount of their exemptions and deductions.
Here, the impact of the marriage penalty could mean that every
penny of personal exemptions is taken away, even if none of them
would be removed if the couple remained unmarried. Similarly,
reductions in itemized deductions could increase their tax bill
by more than $2,375 at top rates.
Why a marriage penalty?
The policy reason put forth for allowing a marriage penalty tends
to be that couples can live more cheaply than singles. But with
no rules preventing unmarried taxpayers from living together and
reaping the same living-cost savings, it'll be interesting to see
how many couples choose not to tie the knot in order to save on
their tax bills going forward.
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