So, let’s preface this by saying, you should not let your decision to get married be influenced by anything you read here. In fact, we respectfully deny any liability for any couple that chooses to break up due to anything you may read here. By the same token, anybody that gets married due to something they read here and subsequently gets divorced is expressly prohibited from assigning liability to us for that decision – and subsequent events. We will, however, happily take credit for anybody that reads this, decides that taxes are the straw that pushes them to the altar, and lives happily ever after. Yep, that was all us. But, if you choose to continue reading, you are assuming any and all “risks” associated with whatever decisions you may make as a result of reading this article.
OK, now that that is out of the way, have you ever heard friends or relatives talking about the “marriage tax penalty”? One unintended feature of the Internal Revenue code has been that by combining income of two married spouses, it sometimes results in either an increased tax liability if they had remained (and filed) single (the “penalty”) or a lower tax liability than if they had remained (and filed ) single (“the bonus”). It is worth understanding that the “marriage penalty” had never been a statutory item – meaning there is nothing in the law that specifically says “you are married so you must pay more taxes”. However, the so-called “penalty” has arisen due to various provisions within the tax law.
Just to be clear, if you are married and living together, your ONLY choices for filing your income tax returns are either Married Filing Jointly, or Married Filing Separately. You cannot file as single or head of household – although we have seen people do just that. It’s illegal.
A marriage penalty or bonus was the difference in a couple’s total tax bill as a result of how they filed their tax returns. These penalties (and bonuses ) affected taxpayers at all levels of the income spectrum – both high income and low income taxpayers were subject to this disparity in the tax code. Taxpayers with or without kids were affected.
Here’s the good news. Trumps new tax plan (the Tax Cuts and Job Act or “TCJA”) has in some respects taken away the marriage penalty. In prior years, the tax brackets for married filing jointly were not twice the brackets as those for single filers. So if a tax bracket for a single person ended at $ 91,900, the similar bracket for a joint filer was not $ 183,800 – in fact, it was $153,100. Under the new tax plan, that disparity has been eliminated. The brackets for married tax payers is now exactly twice the bracket for single filers – with the exception of the top 37% tax bracket. So, only the very highest earners (couples earning in excess of $ 600,000) will still feel the marriage penalty.That’s good news for most couples.
Unfortunately, where the IRS giveth, the IRS also taketh away. While the TCJA has significantly reduced the marriage penalty and the number of couples who will be affected by the marriage penalty, there are still a number of provisions in the tax code where a “marriage penalty” still exists. The 0.9% Additional Medicare Tax as well as the Net Investment Income Tax (NIIT) still impose significant marriage penalties because the TCJA did not effectively double the tax brackets where those taxes are imposed. In addition, for Capital Gains, the brackets where the 15% bracket changes to a 20% bracket also did not double so a “marriage penalty” still exists there as well.
In my opinion, the most distressing “marriage penalty” that went unaddressed in the TCJA is the way Social Security income is taxed. For instance, single taxpayers began to see their social security taxable once they hit $25,000 of other income. For married taxpayers, that limit is $ 32,000 – not even close to double. In addition, the point at where 85% of your Social Security benefits is taxable is $ 34,000 for single filers and only $ 44,000 for joint filers – again, not even close to double.
In addition, similar penalties exist for couples claiming the Earned Income Credit and the Child Tax Credit. There is also a disparity in the income limits for allowable contributions to Individual Retirement Accounts.
Overall, I like the TCJA – it will help a great number of people. However, as in many aspects of the TCJA, it was not well thought out. It was rushed into place so that one party (and person) could claim “victory”. One of the stated goals was to eliminate the “marriage penalty”. So, they took one aspect – the tax brackets, doubled them, and claimed “mission accomplished”. Wrong. Not even close to “mission accomplished”. But, like most things spouted by our politicians, there are some half truths, that have just enough credence to them so that they are not blatantly false. To be clear, this is just as true for the Democrats as it as for the Republicans. I am not making a political statement here. If you know me, you know I am a political cynic. I believe very little (if anything) that comes out of a politician’s mouth. This is simply another example of what happens whenever something becomes a political football. Our tax code should never, ever be a political football, but once again, the talking heads in Washington have made it about them instead of it being about us.
In closing, the politicians would have you believe that the new tax code represents a Valentines Day present to the taxpayers of the United States. To that, I say “Ba, Humbug” and don’t believe everything you read. For married couples, we encourage you to have your tax preparer run your taxes both ways – married filing jointly and married filing separately to figure out which way is most advantageous for you. We will be preparing that analysis again this year for every couple whose tax return we prepare.
Not All CPA’s are Alike. Most CPA firms concentrate on preparing a tax return for you. Very little thought goes into how else can they help you. What are your needs? See how the other side lives – we invite you to find out what “Not All CPA’s are Alike” really means and what difference it can make in your life. Call us at (973) 276-0833 and change the course of your business.