Would you allow tax laws to influence your decision to marry your partner? Many of us may not consider this, but some spouses consider the tax implications.
Over the years, much has been said and written about the marriage penalty. It does not happen to everyone, but historically two people with roughly the same income would have to pay more taxes if they were married rather than single.
The Tax Cuts and Jobs Act (TCJA) changed this to some extent in 2018. Although the new tax law does not eliminate the marriage penalty, it does amend some tax laws to spare many married taxpayers.
The marriage penalty
The marriage penalty stems from the federal tax brackets. Married couples who file joint tax returns have historically successfully earned more income before moving to a higher tax bracket, which makes sense because there are two of them. However, these tax brackets are not always exactly doubled to accommodate two beneficiaries.
The marriage penalty primarily affected spouses who doubled their income, as both spouses earned roughly the same income.
The 25% tax cap exceeded $91,900 for single filers in 2017 and $153,100 for married filers who filed a joint return. If two spouses each earned $91,000, their combined income would be $182,000, which would place them in the 28% category.
What if they made separate marriage returns? The 25% tax limit for married couples filing separately has been reduced to $15,350 less than it would have been if they were single ($76,550).
The bracket for separate marriage returns was set for half of those for joint marriage returns. Filing separate marriage returns also exclude taxpayers from many tax exemptions and credits.
Marriage bond
When one spouse earns much less than the other, they will catch a break with the way the tax brackets were set up. Depending on how much one spouse earns more than the other, the one who earns the most may face a lower tax burden than they would if they have filed a single return.
Low-income families did not necessarily receive a marriage bonus but were largely exempt from the marriage penalty. The married filing jointly 10% and 15% tax brackets for joint married filers were exactly double those for single taxpayers.
The marriage penalty mainly affects middle and upper-income families.
The impact of TCJA (Tax Cuts and Jobs Acts)
The Tax Cuts and Jobs Act significantly restructured the tax categories and effectively eliminated the marriage penalty for many taxpayers.
Most aspects of the TCJA that affect households and individuals will expire after the 2025 tax year. Except for additional legislation, many aspects of the TCJA that affect average taxpayers will revert to what they were in 2017.
To explore how the new tax brackets work, let's return to the example of a spouse earning $91,000 each.
In 2020 and 2021, salaries of $91,000 would put them in a 24% range if they submitted individual returns.
In other words, if the couple files as two single filers or as a couple, their tax category remains the same - there is no marriage penalty.
Although most taxpayers no longer pay the marriage penalty, high-income couples still pay it. The limits for married couples to file a joint return no longer double the limits for a single taxpayer by around 35%.
If you and your spouse earned more than $311,000 in 2020 ($314,000 in 2021), you could end up paying more taxes as a couple than you would as an individual.
However, while those earning more than six figures may fall into the highest tax category when filing a joint tax return, the TCJA has lowered the rate. Those with higher incomes were taxed at a marginal rate of 39.6%. However, the TCJA reduced this rate to 37%.
Tax credits and other issues
The marital penalty is not just about tax brackets. It is evident in other tax circumstances, and the TCJA does not affect all of them.
The working income tax credit always has income limits, depending on whether you are married or single. Marriage and a combination of income will further exclude some low-income couples from claiming this tax credit.
As part of the American Rescue Plan 2021, income limits have been temporarily raised for many tax credits, including the earned income tax credit. More couples may qualify for these loans in 2021, even though their shared income was very high in previous years.
For this itemized state and local tax deduction ("SALT Deduction"), TCJA limits it to $10,000 for each single or married taxpayer who files a joint return. A single pair can claim $20,000 in deductions in two separate statements, but the pair is limited to $10,000 in a single statement.
This deduction limit is reduced to $5,000 for couples filing separately, so filing a separate return will not help you avoid this deduction limit.
As for the SALT deduction, it might not be as unfair to couples as it initially seems. It can be assumed that couples share the payment of these SALT taxes and that two taxpayers cannot claim deductions for the same expenses.
The TJCA has not changed the 3.8% tax on net investment income. This tax applies to investment income over $250,000 for couples intending to file a joint return but $200,000 for individuals.
Two individuals who did not file a joint return would have a limit of $400,000 ($200,000 each), so that marriage certificate leaves $150,000 on the table.
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