Mar 11, 2009

The Return of the Marriage Penalty?

Over at Wisebread, Xin Lu brought up the topic of the dreaded marriage penalty. Okay, so maybe it’s not dreaded in every household, but it is in mine. Marc and I both make pretty good money, which makes us the type of couple that the marriage penalty tends to hurt the most.

I’d heard about the marriage penalty for years, of course, and learned how it works when I took a course on income tax in law school. As you already know, there are different categories of tax filers, the most common being single and married filing jointly.

Logically, you’d think that two people who get married and have a combined income of $50,000 would pay the same amount of taxes as one person who earns $50,000. But the marriage penalty doesn’t work that way. We got hit hard by the marriage penalty when we were first married and ended up owing $2,000 in taxes because of it – keep in mind that if we had remained single, we would have received refunds! This was because the standard deduction for married couples, which we were taking at the time, was not double the standard deduction for singles. Our joint income also probably pushed us into a higher tax bracket than we would have been in if we were single, but I can’t remember for sure.

President Bush’s tax cuts saved us thousands of dollars by closing the gap between the tax brackets for single people versus married couples. In other words, a single person making $50,000 and a married couple with joint income of $50,000 would be in the same tax bracket, whereas in the past, the married couple might have been in a higher tax bracket.

The Wisebread article has me more than a little concerned, since Xin Lu reports that President Obama likely favors the return of the marriage penalty. It’s not exactly a shocker, since he seems really big on the re-distribution of wealth. His plan may be limited to the very wealthy (which does not include us), but these proposals are always subject to change and I am wary. I just hope enough senators and representatives are opposed to taxing married people differently from single people and able extend at least this portion of President Bush’s tax cuts – otherwise my plans for our financial future may take a big hit.

The debate about progressive taxes is one thing – should people who make more money have to pay more in taxes? I’m not sure.

But I am sure that married people shouldn’t have to pay more taxes just because they’re married. It’s an antiquated tax from back when America was more homogenous, with almost all families consisting of a spouse who took care of the home all day and a spouse who worked outside and brought in the family’s income.

These days, of course, most families seem to have two spouses who work, and why should families where the husband and wife make the same amount of money have to pay more taxes than families where the husband and wife make disparate amounts? Or why should a couple who isn’t married but lives together pay less taxes than a couple who gets married?

What do you think of the marriage penalty?


Corrie at "Cents"able Momma said...

I also am against the marriage penalty. Like you, when we were first married, we owed taxes rather than the refund we would have gotten normally. It seems like when you have a marriage penalty, the government is encouraging couples NOT to get married, since it's less expensive to live together (at least for tax purposes). I really hope that President Obama and Congress leave that alone (as well as the child tax credit...but that's for mostly selfish reasons :-) ).

Testing said...

They should take into account what the needs are these days- more than one income to provide for families so it should be the equivalent of two single people when they want to figure how much tax. I don't like this idea at all- I wasn't married before the Bush tax cuts, but I don't want to find out now what it was like before that.

Camille said...

I also wasn't married before the change in the tax system, but I would hate to see it come back! I think when you "punish" people for getting married then you tear apart the moral fabric of our society. I really don't get why you would tax married people more than a single person.

Anonymous said...

This debate has been going on since the 1969 when the first battle of married-vs-single tax bills was fought (couples had the edge back then) and will no doubt continue. This story, though a few years old, has some good basic info:

Tax law changes since 2001 (and in effect through 2010) have eased the possible marriage tax penalty. The standard tax deduction for joint filers is now double that of a single taxpayer. More important, the maximum income in 10 percent and 15 percent tax brackets for joint filers is now double that of a single filer. That effectively means that couples in these brackets are taxed as if they were still single taxpayers.

Despite the changes, some couples still could face a bit of marriage penalty. This occurs when their combined earnings push them into the four higher brackets (25 percent, 28 percent, 33 percent and 35 percent), where the income amounts are not strictly doubled.

And some couples actually enjoy a marriage bonus. This is often the case when there is a large difference between a husband's and wife's incomes.

You can read more about all sorts of marriage and tax connections in this excerpt from my book:

Anonymous said...

This is a complex situation and I think you'd better serve your readers by not getting too political. (AKA "re-distribution of wealth).

I'm a single guy in my 20s making about $80K.

My finance makes $40k.

Right now, IIRC, about 30k of my income is taxed in the 25% bracket.

And again, IIRC, if we were to get married, filing jointly a $120k tax return, only 20k of our income would be in the 25% braket.

But it's more complex, if I were to be making $120k myself and she stays home without making a dime, we'd pay less taxes than we do jointly because of our non-progressive Fica tax.
In that case, the last $20+k of my income wouldn't be subject to Fica.

I Just thank god I live in Florida: No state or local income tax!

Father Sez said...

It does seem unfair. In Malaysia, married couples have a choice of filing separate or joint returns. So we have an avenue to reduce the "marriage penalty".

But then which part of income tax is fair?