Posted by Common Cent$ Bookkeeping and Tax Preparation

Marriage Tax Penalty: How will it affect you as a married taxpayer?

Marriage Tax Penalty: How will it affect you as a married taxpayer?

If you’re thinking about proposing to your girlfriend for marriage soon, there are several important factors you need to discuss with her before doing so. One of these factors is your future tax liabilities as a married couple. Generally, tax professionals will tell you about the many tax benefits you can get in getting married but what they may forget to tell you is that usually only married partners earning a huge difference in income can enjoy those benefits. Married couples earning a similar amount of money and are high earners are usually the ones who have to deal with marriage tax penalties.

The Definition of Marriage Tax Penalty

The term “Marriage Tax Penalty” refers to the added federal income tax a married couple bears when filing joint tax return than filing two separate tax returns. Regardless of the income bracket, all married couples are subject to a marriage tax penalty. Often times, couples with a wider gap between their incomes are able to avoid marriage tax penalty while couples who earn the same amount of income are affected by this penalty the most.

How Marriage Tax Penalty Works

Tax laws created in 1969 gave birth to marriage tax penalty as the Congress wished to provide tax benefits for married couples. Back then, couples usually earn a single large income or two different incomes. As soon as households combined their incomes, the supposed to be tax benefit was transformed into a penalty. Even though married couples filing jointly with only one income can still enjoy tax advantages, doing this increases the chance of paying for marriage penalty. The IRS however recently created The Jobs and Growth Tax Relief Reconciliation Act of 2003 where the effect of marriage penalty was reduced through making the standard deduction the same for both single and married couple. Along with this Act is the increase of the higher end for married couples filing jointly into a 15% tax bracket.

Couples with lower incomes do not have to worry about marriage tax penalty. There was a significant change to the 15 percent tax bracket of $36, 900 annual taxable income for single filers for the year 2014.  The upper limit, on the other hand, doubled compared to married couples. Penalties, however, are charged for married couples filing jointly for the year 2014 because the 25 percent tax bracket ended at $148, 850 which is usually the result when income is combined.

Phase-Outs For Some Credits and Deductions

There are other penalties you also have to worry about such as the phase-outs for some credits and deductions. Since the year 2014, phaseouts for personal exemptions and itemized deductions started at 250, 000 AGI for singles and $300, 000 for those who filed jointly. Now you have the idea of how marriage penalty can affect your chance to reduce your taxable income. The Affordable Care Acts also talks about putting taxes on investments and Medicare that often affects married couples who earns high amount of income. It is noted that the threshold required is $200, 000 for single and $250, 000 for married filing jointly. In other words, if you and your partner both earn $170, 000 per year, there are no tax charges given because both of you are still single. Married filing jointly is the ones who may need to worry about it.

How Will Marriage Tax Penalty Affect You?

Considering all the facts stated above, marriage tax penalty can greatly affect your tax obligations in the future as a married couple. The tax implications such as this one have to be discussed to avoid tax problems as soon as tax season arrives. Married filing separately can offer you greater benefits while filing desperately doesn't really bring the brackets in the same line as single filers. Make sure you figure out how to divide your deductions as well. Since most taxpayers aren’t completely knowledgeable about choosing whether filing jointly is better than filing separately, it is best to consult a tax professional who can discuss to you the advantages and disadvantages of the two status more clearly. Although we have to mention that these laws about softening the marriage penalty remain in effect through 2010. You may need to talk about the recent laws regarding this penalty to a tax professional as well.

Common Cent$ Bookkeeping and Tax Preparation
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