Posted by The TaxAdvocate Group, LLC

Marriage Tax Penalties and Bonuses

Marriage Tax Penalties and Bonuses

In terms of taxes, is it more advantageous to get married or to be alone? As far as the Internal Revenue Service is concerned, your income and your position can determine whether a union is for richer or for poorer.

The federal government and several state and local governments have a progressive tax system, in which marginal rates increase as taxpayers' incomes increase. Because of this system, the income of a couple can be taxed more or less than that of a single tax filer. As a result, some couples incur a tax penalty, while others receive a tax credit when they show up together and not as individuals. Although taxpayers who are already married cannot register as individual taxpayers because they must use "married filing jointly" or " married filing separately," these considerations can be useful in planning financial implications of marriage. For more information on a specific situation, speak to your tax preparer or your professional financial advisor.

What are Marriage Bonuses and Penalties?

A couple incurs a marriage penalty if they both pay more tax returns per pair than if they were single and submitted individually. On the other hand, a couple receives matrimonial bonuses if they pay fewer taxes per pair than if they were single. 

Causes Of Marriage Penalties and Bonuses

The fines and bonuses for marriage are because income tax applies to a couple and not to individual spouses. Under an advancing income tax, a couple's income can be taxed more or less than that of two single people. A couple is not required to file a joint tax return, but their alternative (filing separate tax returns in pairs) often involves a higher tax liability. Married couples with children are more subject to fines than couples without children because one or both spouses can use the status of head of household filing status if they can present themselves as single. And the tax provisions that phase in or out with income produce marriage bonuses or penalties.

Marriage penalties are common when spouses have comparable incomes. Marriage bonuses are common when spouses have mixed-income. In general, couples who receive premiums outnumber those who are penalized. 

Marriage Penalties

Spouses with similar incomes are more likely to face double fines than couples in which one spouse earns most of the income. The combination of common marriage income can bring both spouses to higher levels of taxation.

For example, a couple without children and two incomes could pay more taxes per pair, if the tax ranges for current expenses were less than double that of single expenses. Today, this only affects couples with incomes over $622,000, but it was more common before the 2017 TCJA. A couple with kids can still face marriage penalties because single parents can use the head of household filing status. 

Marriage Bonuses

Couples in which a spouse earns most or all of a couple's income are rarely sanctioned by marriage penalties and almost always receive a marriage bonus since the spouse register transfers the person's income with the highest income to the lowest tax category.

Effects Of The Tax Cuts and Jobs Acts On Sanctions And Marriage Vouchers

The 2017 TCJA has limited many marriage fines incurred by high-income people, although there are certainly fines. Except for the 35% bracket, all tax brackets for couples with a common return are now double the individual bracket. This limits the root cause of the pre-marriage sanctions. It also widens the potential for marriage bonuses, as more and more couples believe that joint filing transfers part of their income to lower tax levels.

Also, the phasing out of the child tax credit now begins at $400,000 for couples, again doubling the starting point of $200,000 for the phasing out of individuals. The previous law gradually phased out $75,000 for singles and $110,000 for couples, which could have introduced another marriage penalty for couples with children.

The phasing out of the alternative minimum tax exemption is another source of marriage sanctions for high-income taxpayers. The income from which the phasing out of the couple exemption begins gradually is less than double. While this is still true under current legislation, the TCJA has increased the alternative minimum tax exemption and the income resulting from its phasing out, so the alternative tax will affect far fewer taxpayers, single couples, and income earners.

The Earned Income Tax Credit and Marriage Penalties

Taxpayers eligible for the EITC tax credit may be subject to particularly high penalties if the spouse's income disqualifies the couple. However, marriage can increase the EITC (a bonus) if a non-working parent makes a joint return with a low-income worker.

Consider a couple with two children and a total income of $40,000, shared equally between the spouses. Two factors will result in a marriage penalty of $ 2,357 in 2020.

First, if the couple was not married, one of the spouses could file as the head of household with two kids, and the other would file as a single. As a result, the standard combined deductions would be $31,050, $6,250 more than the standard deduction of $24,800 offered at a common return.

Second, and more importantly, by filing separate returns, the household could claim an EITC of $ 5,779 and a child tax credit of $ 2,760; the other spouse would not receive a tax credit. On net, the household would receive an $ 8,404, and the other spouse would pay $ 760, which would result in a joint tax refund of $7,644. 

When filing, the couple would receive an EITC of less than $ 2,807, somewhat offset by a child tax credit of more than $ 4,000. Consequently, upon a joint return, the couple will receive a payment of $ 5,287, which is $ 2,357 less than the $ 7,644 they would have had if they had filed separately; the difference is 5.9% of adjusted gross income in 2020.

Marriage penalties are not limited to the tax system. In general, couples receive fewer benefits from government programs than they would have received if they had not been married. 

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