Unmarried couples face many costs, hurdles, and issues, but not the tax married couples pay simply because they tied the knot. The good news is Congress repealed some marriage penalties. The bad news is it retained others and added more, making divorce and the marriage penalty tax news again.
The Marriage Penalty
We call a marriage penalty any time a married couple pays higher income taxes than they would have paid if they were un-married and filed individual tax returns.
The Tax Cuts and Jobs Act of 2017 definitely lowered the cost of being married for many couples. But being married can be more expensive than being two single tax filers on April 15th. For example, if a couple has children and both spouses earn income, they can owe thousands of dollars every year just for being married.
Disparity in Incomes
I’ve written about divorce and the marriage tax penalty before. A common complaint about our tax code is a difference between couples that have similar incomes and couples in which one partner earns much more.
For another example, a couple whose incomes are far apart often pay less if they’re married, while couples whose earnings are more evenly split often pay the same as or more than two singles.
Say that two couples each have total income of $225,000 and no children or itemized deductions. In the first couple, one partner earns $210,000 and one earns $15,000. If they marry, they’ll save about $8,400 compared with filing as two singles.
In the second couple, one partner earns $145,000 and the other earns $80,000. Being married will save them about $300 compared with filing as two singles.
Things change if each couple has two young children and typical deductions for mortgage interest, state taxes and charity. The couple with one high and one low earner has a marriage bonus, although it drops to about $3,200.
The second couple now has a big marriage penalty. They owe about $4,000 more than they’d pay as two single filers—just for one year. Having a $50,000 capital-gain windfall would add nearly $1,000 to their penalty.
SALT and Taxes
In a system that imposes higher rates as income rises, like ours, it’s impossible to tax married couples based on their total income regardless of who earns it while also taxing married couples so they owe the same as two single people.
The U.S. system creates marriage bonuses and penalties. Other countries avoid this by taxing married couples as two individuals shifting to such a system could be difficult in the U.S., in part because of community-property laws in some states.
The Tax Cuts and Jobs Act of 2017 repealed some marriage penalties and broadened some tax brackets, helping many two-earner married couples. But it retained other marriage penalties and added more.
One is the new $10,000 limit on deductions for state and local taxes, such as your property tax bill, known by the acronym “SALT”. This limit on deducting your property tax bill is by return, so married joint filers who list deductions on Schedule A get only a $10,000 write-off, while two single filers living together get a $20,000 write-off.
Affluent married couples hoping to buy a home in expensive areas could also feel a pinch. The overhaul dropped the maximum mortgage debt that’s eligible for an interest deduction on new purchases to $750,000 from about $1 million, and the limit is per return.
So, an unmarried couple can deduct interest on $1.5 million of mortgage debt, while the limit for a married couple is $750,000.
For couples contemplating marriage, estimating the tax cost can be hard. One reason is that marriage penalties often vary over time. For example, a two-earner couple may not owe a penalty when they are first married. If they become a one-earner couple when they have children, they may get a marriage bonus.
The marriage penalties removed by the 2017 law will return after 2025 if Congress doesn’t act before then. Another complication is that the U.S. tax code provides marriage bonuses, even to couples who owe marriage penalties.
Unmarried couples also face problems. They may pay more for health coverage, and they have to prepare two tax returns. They’ll need to take special care with health proxies, powers of attorney and other legal documents that married couples don’t face.
Divorce and Taxes
Since the marriage penalty is where a married couple pays higher income taxes than they would have paid if they were un-married and filed individual tax returns, should you divorce to avoid this penalty?
Divorce is a lot harder than getting married. And the Internal Revenue Service for decades has had the power to disregard divorces that are solely for tax reasons.
The Wall Street Journal article is here.