Does the Marriage Penalty Exist?

Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®

Getting married is an exciting new chapter in your life. The excitement may dampen a bit when tax time comes around and you realize there’s a possibility of paying more in taxes simply because you’re now married. This difference is often referred to as the “marriage penalty”.

For many married couples who file jointly, there is little change in how much they end up paying in taxes.  However, there are situations where couples will see a penalty or might even see a bonus when they compare their taxes from when they were single.

Let’s explore some of the more common situations when being married might affect how much you owe in taxes.

Marriage Penalty in Ordinary Tax Brackets

Historically, couples got hit with a marriage penalty because the married filing jointly tax brackets were less than twice what the single brackets were. As income increased, they would move into higher tax brackets quicker, resulting in a larger tax liability.

There is a bit of good news on this front, though. When the Tax Cuts and Jobs Act passed in 2017, it reduces the marriage penalty for many families by expanding most of the married filing jointly tax brackets to be twice the single brackets. This is currently true through the 32% bracket.

Higher income individuals will still find themselves subject to marriage penalty if they have income taxed in the 35 or 37% brackets. The size of the penalty increases as they move further through each bracket.

Other Items Impacted by Marriage

Some of the items more likely to impact a larger number of taxpayers are highlighted below:

– There are caps on certain itemized deductions that are the same regardless of a person’s filing status.  The $10,000 cap on state and local tax deductions (SALT) and the $750,000 cap on mortgage interest deduction are the two most notable.

– The capital loss and passive loss deductions against ordinary income are limited to $3,000 and $25,000 respectively for all taxpayers.

– The additional Medicare taxes on employment income (0.9%) and net investment income (3.8%) are two other examples. The threshold when these additional taxes apply is $200,000 for single filers and only increases to $250,000 for those who are married filing jointly.

– If you receive the earned income credit, the income limits for married filing joint taxpayers are only a few thousand dollars higher than the single limits, rather than double.

– If you’re receiving Social Security, the level at which your benefits are taxed arrives sooner. For single filers, you start paying taxes on your benefits once income reaches $25,000. For married taxpayers, you’d expect the threshold to be twice that ($50,000). However, the threshold starts at $32,000 for married taxpayers.

– The phaseout of AMT is another area that can hurt married taxpayers. However, since the TCJA passed, very few taxpayers are subject to AMT, so it impacts far fewer couples than before the latest tax bill passed.

– Currently, 16 states that have an income tax also have marriage penalties. They vary by state, so understanding the nuances of your state’s tax code is important. We recommend reviewing these differences with your tax preparer if you’re concerned with how marriage might impact your taxes.

Marriage Bonuses

There are certain situations where you may pay less in taxes when married.

The most likely scenario is if one spouse earns most or all the couple’s income. They rarely incur a marriage penalty and almost always receive a bonus because the wider joint brackets shift more of the higher earning spouse’s income into a lower tax bracket.

Can You Avoid the Marriage Penalty?

Oftentimes, couples may think they can choose married filing separately to avoid the marriage penalty and have the same result as when they filed single. Unfortunately, this is rarely the case. Usually, you end up being worse when choosing married filing separately because you can lose access to some credits and deductions you might have otherwise qualified for under married filing jointly.

There are certain situations where married filing separately might make sense, like when one spouse has high medical bills or has an income-based student loan repayment plan.

While the marriage penalty has been reduced or even eliminated for many couples, if you have higher income or take advantage of certain credits or deductions, the penalty will still be present.

If you’d like to better understand your tax situation, reach out to your Shakespeare financial advisor. We are here to be your trusted partner and help add clarity through life’s transitions.