Marriage Tax: Will You Pay More Or Less In Taxes After You Get Married?
You might assume that after you get married you will pay the same taxes, but that’s almost never the case. Some married couples end up paying more in taxes while other couples pay less by filing joint taxes.
When you end up paying less in taxes it is known as a marriage bonus and when you end up paying more in taxes it’s known as a marriage penalty. So how do you if you will be punished or rewarded with the US Tax Board after tying the knot?
In most cases, when two people with unequal incomes marry they receive a tax bonus. While couples with equal incomes, regardless of high or low income, typically incur tax penalties.
The Marriage Tax Bonus
Even though taxes help make our country great, no one enjoys paying them. On the contrary, you practically jump for joy upon finding out your tax bill decreased after getting married—now that’s a win-win! Not to mention, tax bonuses can be as much as 20% of a couple’s income.
A typical scenario in which a married couple would get a marriage bonus is if one partner makes $75,000 and the other partner makes $25,000. The vast inequality in these two incomes makes this couple eligible for a marriage tax bonus. The reason for this is simple: the additional income brought in by the lower-paid spouse is not enough to push the couple into the next tax bracket and increase the percentage they must pay.
Married couples have different and much wider tax brackets than individuals, hence why it’s difficult for couples to get pushed into the next tax bracket unless both partners make equal amounts of money—thus doubling their individual incomes.
Let’s say Mary makes an annual salary of $50,000 and John makes $25,000, for a combined total of $75,000. While Mary and John remain legally single they pay a combined total of $13,200 in taxes. Yet, after they get married they refer to a different set of wider tax brackets for couples. Under these wider brackets less of the couple’s income is taxed at the 25% marginal tax rate. That means instead of paying $13,200, they now only pay $12,975.
The Marriage Tax Penalty
Regardless if a couple makes high or low salaries, if they make a comparable amount they usually incur a marriage tax penalty. Penalties can be as much as 12% of a couple’s combined income.
Tax brackets for couples are wider than tax brackets for individuals and it generally takes both partners making similar incomes to jump up into the next bracket. For instance, a single individual making $189,300 is taxed at 33%. The same 33% bracket for married couples starts at $230,450. Individually, someone making $150,000 does not fall in the 33% bracket. BUT if two people making $150,000 get married they have a combined income of $300,000, putting them in the 33% tax bracket.
Low-income individuals deal with tax penalties too. For example, let’s say Tim and Carey are married with 1 child and they each make $15,000 a year for a combined total of $30,000. As single individuals they would pay -$1,594 in taxes after receiving $1,000 Child Tax Credit (CTC) and $3,359 in Earned Income Tax Credit (EITC), granted to the person that claims the child. After getting married this same couple still has a negative tax bill of -$506.12, but a total penalty of $1,087.88.
But why, nothing changed besides their marital status? As a married couple Tim and Carey can no longer claim one partner as ‘head of household,’ which results in the loss of considerable savings and higher combined taxable income. Also, prior to marriage one partner could claim their child for the EITC. Yet, after marriage their combined salaries push them into a different bracket that makes them eligible for less EITC.
So while a couple with low incomes may not jump up to a higher tax bracket, they are often eligible for fewer credits, resulting in marriage tax penalty.
How Children Impact Taxes
Couples with one or more child are more likely to receive greater penalties and bonuses, depending on their combined salaries. For instance, a couple with no children will receive a penalty no greater than 4% or a bonus no greater than 7% of their total combined income.
A couple with 1 child could see penalties as high as 12% and bonuses as much as 20%. Add two children to the table and bonuses can be as high as 12% and penalties 10%.
But Still… Why?
There are three fundamental reasons marriage bonuses and penalties exist. The U.S. tax code actively seeks to accomplish:
1. Equal treatment of married couples
2. Equal treatment of married and unmarried couples
3. Progressive taxation
In order to get rid of bonuses and penalties one of these goals would have to be sacrificed. Implementing the changes necessary would impact many other elements including the current distribution of taxes paid. Politically speaking, this would be very difficult and messy to accomplish.
That doesn’t mean Congress is ignoring the issue all together. Most recently, in 2009, Congress passed a reform that increased the amount of income a married couple could claim and still remain eligible for the EITC. Still, this measure is temporary and will expire in 2017, meaning a large number of low-income families will have higher marriage penalties next year.
How Do These Bonuses & Penalties Impact Marriage?
Research has found that marriage penalties have little to no impact on a couples’ decision to get married, but they do impact how much each spouse works.
Every year Americans lose millions of dollars by simply filing taxes without the help of a certified accountant. DGK Group is happy to help you file your joint taxes so that you receive all eligible credits and deductions.