President George W. Bush’s tax cuts were attempts to remove the so-called “marriage penalty” from the Internal Revenue Code. This marriage penalty continues to impact high, middle, and low income couples. The following questions summarize what may affect the marriage penalty or possibly even result in a marriage “bonus.”
What is the Marriage Penalty? The marriage penalty occurs because some sections of the Internal Revenue Code create differences in the tax liability of a married filing joint (MFJ) couple and the combined tax of two single filers. A couple may experience a marriage penalty or bonus depending on their earnings, credits, and deductions.
What is the typical cause of a Marriage Penalty? When a married couple files a joint income tax return, they may find that that their tax liability ends up either higher or lower than their combined liability would have been if each had filed as single. When both spouses file jointly, more of their income is taxed at a higher marginal tax bracket, but their allowed deductions have not increased. As they move into a higher tax bracket, this result is referred to as the marriage tax penalty. This means that MFJ taxpayers will owe more income tax liability than they would have as two single taxpayers.
In some circumstances, married taxpayers enjoy tax advantages. When there is a great difference between the respective incomes of the two spouses, a marriage bonus occurs. Higher income individuals can average their income with that of a lower income spouse and therefore the couple receives the benefit of a lower tax bracket.
How can the marriage penalty be avoided? Generally a married couple cannot avoid the marriage penalty by filing as married filing separate (MFS). Filing as MFS may actually increase a couple’s tax liability because most tax deductions and credits are taken away from taxpayers filing under this status. However it is possible that filing as MFS may result in a lower combined tax for a couple than if they choose married filing jointly. This happens when there is a spouse with much higher income and the spouse with the lower income has deductions that are subject to an adjusted gross income percentage limitation that would be lost if they choose to file jointly.
For high income earners, personal and dependency exemptions under the regular tax calculations were phased out in 2009. The phase-out began when AGI exceeded $166,800 for single taxpayers. For married taxpayers the phase-out began when AGI exceeded $250,200. Married taxpayers who earned more than $125,102 each began to lose their personal and dependency exceptions. If they had remained single they would not lose their personal and dependency exemptions. In 2010 the limitations on itemized deductions as well as the phase outs were removed. Both are scheduled to return in 2013 unless Congress chooses not to extend them.
The Child Tax Credit was meant to give tax relief to families with children. This provision allows for a $1,000 tax credit per child. Families that do not earn over a certain amount of income are allowed to take this credit. This credit is phased out for higher income taxpayers. The phase out for married couples actually begins at $110,000 but for no marriage penalty to exist the phase out should begin for married couples when their AGI exceeds $150,000. The marriage penalty can, in some cases, create a disincentive for marriage and put financial pressure on certain families.
Anil Melwani, CPA
646-699-4818, CPA@armelTax.com , www.armelTAX.com