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Understanding Marriage Tax Penalties and Its Effect on You

Understanding Marriage Tax Penalties and Its Effect on You

The marriage tax penalties come into play when the taxes paid for joint filing is more than what you would have paid if both parties filed as single. 

Before the 2017 TCJA, some couples got a rather unpleasant surprise when it's time. Couples with similar earnings, focusing on people in the high earning bracket, were subjected to a tax penalty. With a marriage tax penalty, some of the tax benefits you enjoy as a single person will be lost.

 

What is the Marriage Tax Penalty ?

Married couples can file their tax either jointly or separately. However, when the joint-filing results in you paying higher taxes as a joint couple, compared to what you will pay as a single filer, there is a penalty. 

The reform of 2017 adjusted the tax bracket, which made the income level for couples that file jointly almost double that of taxpayers filing singly. This will become prominent if you consider the IRS tax brackets.

 

2020 INCOME TAX BRACKETS RATES

SINGLE FILERS TAXABLE INCOME RANGE

MARRIED FILING JOINTLY TAXABLE INCOME RANGE

MARRIED FILING SEPARATELY TAXABLE INCOME RANGE

10%

$0 to $9,875

$0 to $19,750

$0 to $14,100

12%

$9,876 to $40,125

$19,751 to $80,250

$14,101 to $53,700

22%

$40,126 to $85,525

$80,251 to $171,050

$53,701 to $85,500

24%

$85,526 to $163,300

$171,051 to $326,600

$85,501 to $163,300

32%

$163,301 to $207,350

$326,601 to $414,700

$163,301 to $207,350

35%

$207,351 to $518,400

$414,701 to $622,050

$207,351 to $518,400

37%

$518,401 or more

$622,051 or more

$518,401 or more

Table Source: IRS


How the Marriage Penalty Affects You 

When people discuss the marriage tax penalty, it is usually a factor of the tax bracket. It, however, applies to a series of tax cases:

For example, the cap on specific itemized deduction remains the same no matter the taxpayer's filing status. This consists of a $10,000 limit on the local and state tax deductions alongside the limit on the deduction for mortgage interest that has a limit of $750,000 of loan. 

This, however, does not slide up for couple filers as separate filing will not give couples the double deduction since the deduction will be divided between both tax forms involved. 

For another illustration, some taxpayers pay a 0.9% additional Medicare tax if the income gets to a particular level. For single tax filers, the threshold is $200,000, while married couples will commence their tax payment as their income gets to $250,000. 

Also, there is an income limit for married couples that get the earned income tax credit, and the limit is below the double value that is used for single taxpayers. For the tax year 2020, as an example, a single filer with three kids will earn $50,594 alongside the earned income tax credit, while couples filing jointly must have below $56,844 to qualify for the credit. 

The marriage penalty also does not exclude retirees from getting their Social Security Benefits. As soon as single taxpayers have a combined income of $25,000, they will be slammed with taxes on such benefits. In the absence of a marriage penalty, all couples would only pay taxes when their total income is $50,000. In reality, however, some part of a married couple's social security benefits are taxed once the benefits get to $32,000.

 

Is it Advisable to File Separately or Jointly with Your Spouse? 

Sadly, separate filing will not help couples dodge the marriage tax penalty. It might, however, be beneficial if either of the spouses has a substantial medical bill in one of the years. 

Health care bills above 7.5% of the AGI of the taxpayer can be deducted provided they go through the itemizing route. Filing separately might qualify for those deductions, or else the couples' total income could make it hard to get past the 7.5% limit.

Joint filing might be a good thing in homes where one of the couples is a stay-at-home spouse. In other words, with one person making money, filing jointly makes sense. 

On a final note, make sure to consider the tax implications as you prepare to get married. You can talk to a tax professional such as UNIVERSAL ACCOUNTING & FINANCIAL SERVICES, INC. to help you decide whether you will be better off filing separately to avoid tax penalties.


FOR MORE INFORMATION ON HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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