Marriage Penalty Definition Who Gets Hit With It

Marriage Penalty Definition, Who Gets Hit With It

What Is the Marriage Penalty?

The term marriage penalty refers to the additional tax burden married taxpayers face compared to single filers. Marriage has tax implications for those who tie the knot. A married couple’s income may be subject to a penalty of up to 12% if they have children and up to 4% if they don’t. This assumes taxpayers use standard deductions and report only wage income.

Key Takeaways

– Some individuals experience a tax hit after they get married.

– Spouses with similar incomes are more likely to experience marriage penalties.

– 15 states impose marriage penalties in addition to the federal government.

– The Tax Cuts and Jobs Act lessened the impact of the marriage penalty.

– Certain couples, such as those with disparate incomes, are more likely to experience marriage bonuses.

Understanding the Marriage Penalty

Marriage comes with advantages, but there are financial drawbacks to consider. The marriage penalty is an additional liability that married couples face when paying their taxes compared to unmarried taxpayers. This penalty applies when married couples file their tax returns together. Factors that may influence the marriage penalty include individual and combined incomes, income disparity, and the number of children involved.

Marriage penalties aren’t just a federal concern. 15 states impose a marriage penalty because the income tax brackets for married couples filing jointly are not twice as large as the brackets for single filers.

The Tax Cuts and Jobs Act lessened the impact of the marriage penalty by equalizing tax rates for joint returns with single counterparts. However, some provisions in the act may increase the marriage tax penalty.

Special Considerations

There are situations that may trigger marriage penalties in addition to the factors listed above.

Low Earners With Similar Incomes: Low earners who qualify for the earned income tax credit (EITC) may face a lower after-tax income if they marry due to the EITC diminishing or disappearing.

High Earners With Similar Incomes: Couples who jointly earn between $647,850 and $1,079,800 will pay higher taxes if they marry because the federal tax bracket for married couples filing jointly is not twice as large as the bracket for unmarried individuals.

High Earners Hit With the Medicare Surtax: The Medicare surtax applies to couples whose earnings range from $250,000 to $400,000.

High Earners Hit With the Net Investment Income (NII) Tax: The NII tax applies to couples whose combined earnings range from $250,000 to $400,000. This tax applies to net investment income, not earned income.

High Earners With Long-Term Capital Gains: The tax bracket for long-term capital gains on investments is not double for married couples filing jointly.

Homeowners With Large Mortgages: Married couples may face limitations on mortgage interest deductions compared to unmarried couples.

Marriage Penalty vs. the Marriage Bonus

Not every married couple has to pay a penalty. Spouses who file jointly can enjoy a bonus on their combined marital income if they have children or are childless. This bonus often kicks in when one partner’s income is substantially higher.

Is It Better for Married Couples to File Jointly or Separately?

It is almost always more advantageous for married couples to file joint returns rather than separate returns. By filing jointly, couples are more likely to receive lower tax rates, share in the same tax benefits, and qualify for benefits they would not otherwise be eligible to receive under a MFS status.

Can I File Single If I am Married?

No, if you were married at the end of the tax year, the IRS does not allow you to file as a single individual.

Why Would a Couple File Separate Returns?

If a married couple has a large discrepancy in income, it may be advantageous for them to file separate returns, especially if the lower earner has a very low income. Additionally, the lower earner benefits when they are eligible to itemize deductions and have deductions tied to a lower AGI.

The Bottom Line

Few couples base their marriage decisions on tax consequences, but marriage does influence how much each spouse will work and can greatly affect tax implications. Couples should be mindful of the changes they may face and plan accordingly.