The Marriage Penalty: Why Your Taxes Go Up When You Tie the Knot
Getting married or soon or got married recently? You may be presented with an unpleasant gift that was definitely not on your registry! That’s right, we’re talking about your taxes.
A lot of couples actually end up paying less in taxes once they are married, but that’s not the case for all. Some of them end up with a “marriage penalty”, which means they now owe the IRS more than when they were unmarried and filed as single taxpayers.
This penalty comes into effect when tax-bracket thresholds, deductions, and credit are not double the amount allowed for single filers. As such, it can impact high and low-income earners equally, as well as young or older couples.
When are Your Taxes Due?
Typically, taxes need to be filed before the end of April for the previous year, but there have been concessions made this year due to the ongoing pandemic. Federal tax deadlines were moved to the end of May, but you may need to check your state’s guidelines for the exact date as they tend to be different. If you got married at any point during the past year, you will have to file your 2020 tax return as a married couple either jointly or separately.
If you plan to get married in late 2021 or early 2022, you still have some time to prepare. Here’s what to know about the marriage tax penalty.
For Higher-Income Couples
If you are a high earner, you may face a bigger tax bill due to few different sources. According to 2020 tax brackets, single filers are charged 37% from a taxable income of $518,400. However, for married couples filing jointly, this rate is applied to an income of $622,050 and higher.
“The tax brackets are doubled for most taxpayers, but there’s still a penalty for the top tax rate,” said Garrett Watson, a senior policy analyst at the Tax Foundation.
For example, two individuals who have incomes of $500,000 each would fall into the 35% tax bracket, which is the second-highest there is if they file as single taxpayers. However, when filing together as a married couple, their combined income of $1 million makes them eligible to pay 37% on $377,950 (the difference between their income and the $622,050 threshold for the highest rate). This means that they end up paying about $7,760 more in income taxes for 2020.
Certain other tax code provisions may also impact married couples who fall into the high-earner category. For example, the Medicare surtax of 0.9% only kicks in when an individual earns more than $200,000 per year, but the limit for married couples is only $50,000 higher at $250,000.
How to Balance Marriage and Finances
Getting married doesn’t have to mean that you are doomed to pay more income tax forever. There are certain areas where you can benefit as well.
For one, the income threshold for the 3.8% investment-income tax is not doubled, so singles who have a modified gross income above $200,000 need to pay the tax, but married couples filing jointly pay it if their income goes beyond $250,000. This tax is applicable on things such as interest, dividends, capital gains, and rental or royalty income.
Moreover, the limit on the deduction for state and local taxes (SALT) does not double when a couple gets married. Single individuals and married couples are both privy to the $10,000 cap (married couples filing separately get $5,000 each for the deductions). But it is important to keep in mind that this deduction is only available to tax filers who itemize.
For Lower Earners
If you are a lower-income earner, you may face a marriage penalty from your earned income tax credit.
This credit is available to working taxpayers with children who meet income limits and certain other requirements. Some low-income earners who do not have children may also qualify for it. This is a refundable credit, which means that you could get a refund even if your tax bill is zero. Therefore, working parents with low to modest income can benefit from it greatly.
But the caveat for married couples is that the income limits that come with the tax break are not double for joint or separate married filers. Recent legislation has expanded the credit for 2021 – but this largely affects working individuals who aren’t parents. The income limits for married couples has still not been doubled!
Fifteen states have a marriage penalty built into their marginal tax brackets that hits taxpayers when they tie the knot. It is more obvious in certain states compared to others. For instance, single filers in Maryland have to pay the top rate of $5.75% if they have an income higher than $250,000, but this amount is only increased to $300,000 for married couples.
However, where you live may give you certain benefits in helping dodge the marriage penalty, says the Tax Foundation because some states allow couples to file separately on the same return so they may avoid getting hit with a penalty or lose credits/exemptions.
Social Security Income
For older couples who are already retired and receiving Social Security, getting married can have additional tax implications.
As a single filer, you will not owe any taxes on such benefits given that the total of your adjusted gross income (nontaxable interest and half of your Social Security benefits) is under $25,000. But, in the case of married retirees who file a joint return, this amount is only increased to $30,000 and not double the amount for single filers.
Furthermore, if you or your new spouse have a traditional or Roth individual retirement account that you contribute to regularly, you will have to be careful of how much you put into such IRAs. This is because of limits that apply to deductions and contributions which take into consideration income from both spouses.
If you are tying the knot soon or did so very recently, don’t automatically assume you will have to pay more taxes. Part of being prepared is to be aware of how much you may need to pay so you can alter your budget accordingly.
You can get an estimation of how much taxes you would end up paying as a married couple by putting the details of your and your partner’s financial situations into the Tax Policy Center’s marriage calculator. You can adjust it according to wage incomes, business income, children that are your dependents, etc.