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The Surprisingly High Cost of the Marriage Tax Penalty

If you are considering getting married, you may want to add a conversation with your financial advisor and a tax expert to your to-do list. For couples that have high and roughly equal incomes, the cost of the wedding may pale compared to your extra tax bill for years to come.

Marriage is generally considered both a benefit to those betrothed and to society itself. Yet the convoluted tax code – which provide incentives for many activities that Congress wishes to encourage, such as home ownership and energy conservation – often severely penalizes marriage.

The table below shows three examples of a couple paying between 13% and nearly 22% more in Federal income tax as a married couple. These examples assume each partner earns the same income; they have two dependent children and take the standard deduction. Further, it assumes one partner claims the children as dependents on their return and files as Head of Household; the other partner files as Single.

Estimated 2012 Federal Income Tax

Adjusted Gross Income

Married
(Filing Jointly)

Unmarried
(Single + Head of Household)

Marriage Penalty

$40,000 / $40,000 $5,065 $4,468 13.4% higher
$75,000 / $75,000 $22,785 $18,713 21.8% higher
$150,000 / $150,000 $68,950 $61,012 13.0% higher

Source: Estimated 2012 Income Taxes based on H&R Block’s online Tax Estimator calculator. Assumes equal AGI for each party, 2 dependent children and assumes tax payers take the standard deduction.

 

MarriageBlog

The marriage penalty comes about for a number of reasons and can be exacerbated if the couple has children. The primary cause at higher incomes is the difference in breakpoints when income is subject to higher tax rates. For 2012, Adjusted Gross Income (AGI) above $85,650 is taxed at a marginal rate of 28% for a Single filer, but the 28% bracket starts at $142,700 when filing Jointly (doubling the single filer breakpoint would imply a “fair” breakpoint at $171,300). At combined incomes below this $142,700 level, non-married couples with children benefit from lower income limits on the child tax credit ($75,000 for Single and $110,000 for a Joint return) and the ability for one parent to potentially file as Head of Household.

Even though $4,000 per year in additional taxes may seem like a small price to pay for a couple earning $150,000, it amounts to a 20+% increase. Furthermore, it recurs every year. Considering most married couples probably have 25+ working years remaining, you are talking about a tax penalty of over $100,000 for the privilege. Making the cost of the wedding (average ~$26,000) seem like a bargain.

It Gets Worse
To make matters worse, the tax increases passed in January to address the “fiscal cliff” added an additional layer of marriage tax penalties on high-earning, two-income households starting in 2013. Congress re-introduced the phase-out of itemized deductions and personal exemptions for single filers with an AGI above $250,000, but started the phase-out at only $300,000 for married couples. Assuming equal earnings, that is an extra $200,000 in earnings subject to the increased levy. There is similar unequal treatment in the exemption amount and phase-out thresholds for those paying the Alternative Minimum Tax and in the new 3.8% surtax on investment income.

And don’t think this is just a problem for high earners. The Earned Income Tax Credit, which provides benefits to low-income workers with children, has similar disincentives for couples to marry.

Still want to get married?
If politicians really want to encourage economic growth and foster a stable society, it seems like creating a tax code that doesn’t discourage marriage would be a good starting point.

So does the tax code really discourage marriage? Given all the changes in cultural norms over the past 40-50 years, it’s hard to pin the blame on taxes alone. But the number of married adults in the U.S. has declined by 20 percentage points since 1960 (according to the Pew Research Center) and the marriage penalty was introduced into the tax code in 1969. You be the judge…

Sources:
H&R Block, Online Tax Estimator

Pew Research, “Barely Half of U.S. Adults Are Married – A Record Low,” Dec. 14, 2011.

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