The Tax Implications of Getting Married

Most Americans have heard of the “marriage penalty,” which refers to the increase in a couple’s tax bill from what they would otherwise pay separately as individual taxpayers.  But, did you know that there may be circumstances under which there is a “tax bonus” to getting married?

Why a Tax Penalty or Bonus at All?

There are several reasons why a married couple may pay more or less filing a joint tax return than they, in the aggregate, would as single taxpayers:

1. The Structure of Tax Brackets—The first two income tax brackets for married couples are exactly double the single filer brackets. However, that relationship crumbles with the higher marginal rates. For instance, the income ceiling on the 25 percent bracket for a single filer is $91,900, while for married couples it is $153,100. That gap continues to narrow until it merges at the 33 percent marginal income tax bracket.
2. Tax Surcharges—Tax surcharges kick in at certain income levels, specifically the 0.9 percent Medicare surtax and the 3.8 percent investments tax, which were passed as part of Affordable Care Act (ACA). These taxes are levied upon reaching an income threshold: $200,000 for single individuals and $250,000 for married couples filing jointly.
3. Phase Out of Deductions—The phase out of itemized deductions begins at $313,800 (in 2017) for married couples, only marginally higher than for single taxpayers ($261,500 in 2017).

The Cost of Marriage

The additional taxes a married couple may pay will vary, but it can be as high as 12 percent of a couple’s income, according to an analysis by the Tax Foundation.^*

Let’s consider the hypothetical case of Robert and Beth Hallard, both of whom were making $150,000 per year as unmarried taxpayers. Individually, they would each pay $32,070 in taxes, assuming the use of the standard deduction. As a married couple, their tax bill would be $67,353, or $3,214 in additional income taxes.

The Marriage Bonus

The tax picture sometimes improves for a married couple. This typically occurs when there is a disparity in income between the spouses.

For instance, let’s change the above example of Robert and Beth to where one is making $150,000 and the other is making $35,000 per year. In this scenario, the combined tax bill for Robert and Beth as single taxpayers is $35,294. As a married couple, their taxes actually fall $2,433, to $32,860.

This bonus is realized because some of the high earner’s income falls into a lower tax bracket upon marriage.

The tax calculations in this article were made using the Tax Policy Center’s calculation tool, which we encourage you to use the next time your client asks “Will I pay more taxes by getting married?”

Source:

*https://taxfoundation.org/understanding-marriage-penalty-and-marriage-bonus/

See referenced disclosure (2) (4) (5) at https://blog-dev.americanportfolios.com/disclosures/