Marriage Tax Penalties: Does It Really Exist

Marriage Tax Penalties: Does It Really Exist

Planning for a marriage is one of the major events in the life of many people. However, many fail to account for a critical thing during the process- taxes. As a result, everyone planning for marriage should understand its effect on their finances as there could be huge surprises down the line, especially when it's time to file your tax return. 

New Filing Status sends you to a New Rate. 

Marriage opens up a new chapter in your life and your finances, including your taxes. As a result, you will be automatically translated into a new filing status: married filing jointly (MFJ) or separately (MFS). In many cases, most couples like to file jointly as it allows them the privilege of taking full advantage of credits and deductions like:

  • Adoption tax credit

  • Child tax credit

  • Lifetime learning credit

  • Fees and the Tuition deduction

  • American Opportunity tax credit

  • Child and dependent care credit. 

For people who have spouses with substantial tax bills, filing separately might be the best call. However, many couples prefer the joint route for their taxes to get all the benefits they qualify for. 

Besides, many couples do not concern themselves about marriage tax penalties due to the impressive benefit of expanded income ranges of the tax brackets involved. Couples often might be eligible for a marriage bonus as their income might qualify for a lower tax rate. The tax bracket ranges for MFJ are almost double that of single filers until they reach the highest tax bracket.

High earning couples have a higher probability of feeling the marriage penalty. However, at times, people in the lower tax bracket might be slammed with such penalties.


Understanding the Principle of the Marriage Tax Penalty

When you pay more taxes as a couple than what you paid when single, you are automatically a victim of the marriage tax penalty. It mainly applies to high earning couples as they have to pay a higher tax rate. To understand how the effect of income combined with a spouse can affect your taxes, one needs to explore the federal tax bracket and rate for 2020 and 2021. 

For the 2020 tax filing year, the highest income earner will have to pay a 37% tax rate for MFJ with income above $622,050, while single filers only need to get to $518,400 of income before they pay such rate.


Itemized Deduction Limits Won't Increase.

Married couples can enjoy a standard deduction amount in double value, which brings down their taxable income. However, itemized deductions are similar, no matter the filing status.  There are certain limits on some itemized deductions that cannot be doubled. 

As a result, one is still limited to $10,000 on local and state tax deductions, alongside the interest on values up to $750,000 on the primal loan on mortgage interest deduction.


Earned Income Tax Credit

Their probability of being qualified for the coveted Earned Income tax credit might be jeopardized for low-income earners. Single filers with three kids for the 2020 tax year might have incomes up to $50,950, while married couples need to have income below $56,844 for them to qualify for this tax credit.


Additional Medicare Tax

When your income gets to a particular level - $250,000 for MFJ and $200,000 for single taxpayers, one might need to pay an extra Medicare tax of 0.9%. As a result, if you never paid this tax beforehand, you might have to pay it, especially if your spouse earns higher since your income will move higher.


Social Security benefits 

Sadly, the marriage tax penalty also affects your benefits from social security as well. A single filer only needs to worry about social security taxes after earning $25,000, while married couples must pay the tax when their income gets to $32,000.


The fact that the marriage penalty applies to you is not a license to ditch your marriage goals and plan. However, it is a call to work with your partner to bring down your taxes legitimately. Get in touch with a marriage professional for help on how to make this happen. 



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