The "marriage penalty" of taxes in America - how does it affect you?
It is tax season again, and it seems that every year the tax code in America gets a little more convoluted. One thing in the tax code that has always annoyed me is something called the "marriage penalty". Basically, the penalty occurs when two people with similar incomes are pushed into a higher tax bracket once they get married and file jointly. Here is a little history on this phenomenon and how it could affect your wallet.
The marriage penalty was instated in 1969 because married couples paid less taxes than singles on the same amount of income due to the way income was split between a married couple. The way taxes worked back then was that a married couple's income was totaled and then cut in half, and each half was taxed as an individual. This means that a couple making $80,000 would be taxed as two individuals making $40,000, but a single person making $80,000 would be taxed at higher rates. So new tax tables were drawn up in 1969 that put married couples in a higher tax bracket than two single people with the same income.
Before President Bush's tax cuts, the marriage penalty was quite severe and penalized most married couples with two similar incomes. If you look at the Federal tax brackets in 2000, it shows that a single person making $26,250 to $63,550 was in the 28% bracket, while a married couple landed in the 28% bracket with $43,850 to $105,950 of income. This means that two people making $22,000 each would have been hit with higher taxes once they got married even if they had no additional income. Additionally, the standard deduction for a married couple in 2000 was $7,600 while the standard deduction for a single filer was $4,400. This means that a married couple would shield less of their income from taxation than two single filers if they took the standard deduction.
After the Bush tax cuts, the marriage penalty was lessened or eliminated for most middle income families. If you look at the 2003 Federal tax brackets you will see that a single filer making $28,400 to $68,800 is in the 25% bracket and a married couple making $56,800 to $114,650 is in the 25% bracket. Additionally, the standard deduction was changed so that a married couple has the same standard deduction as two single filers. The marriage penalty is still fairly obvious in the higher brackets of income, but it was greatly decreased for most married couples.
It is unclear what will happen to the difference between single and married tax brackets once the Bush tax cuts expire because the change to lessen the marriage penalty is supposed to also expire. President Obama did say that he will increase the tax brackets for singles making $200,000 and married couples making $250,000 or more, and this is a fairly good indication that he supports the marriage penalty. Imagine a successful couple making a taxable amount of $130,000 each. If they stayed unmarried they would be in the 28% marginal tax bracket, and they would not be affected by a tax hike since they make less than $200,000 each. However, if they got married they would be pushed into 36% marginal tax rate since their incomes would combine to be more than $250,000 and their marriage penalty is nearly $5000 a year based on 2009 tax tables. Granted, this couple would probably be able to afford the extra taxes, but they will probably be a little miffed about paying thousands of dollars more every year just because they are legally married.
On the flip side, the current tax system is advantageous to couples who have incomes that differ by quite a lot. For example, suppose one person makes $100,000 and the other partner makes $34,000. Then they would be currently in the 28% and 25% brackets respectively. However, if they get married their total income would put them in the 25% bracket together, and they would save hundreds of dollars every year. Because of the inequality, groups have argued that the current tax system supports an one income family and encourages women to stay at home.
Personally, I think that the IRS should just simplify the entire thing by taxing everyone as an individual based on their own individual income since they should not be discriminating based on marriage status. Some say that married couple get to save money by pooling resources so they should pay more taxes, but couples that live together get to pool resources, also. What do you think? Did you pay more or less taxes when you got married? If you are not American, does a marriage penalty on taxes exist in your country?