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November 27, 2005 -- With my wedding in a few weeks and tax time creeping up, I have heard people joke about the "marriage penalty". What is this exactly?

The marriage penalty exists whenever the tax on a couple's joint return is more than the combined taxes each would pay if they weren't married and if each filed his or her own single or head of household return. The tax is more on a joint return when the couple's taxable income is pushed into a higher marginal tax bracket than would apply if the couple wasn't married (so they pay at a higher rate on the same total income than they would pay if each were single). And that usually happens where both spouses work and have relatively equal incomes.

Note that although, as you may have heard, Congress has acted to provide some relief from the marriage penalty in the tax rates, however those changes don't address the marriage penalty effect under the rates for joint filer's income taxed at rates above 15%.

For example, say that two taxpayers each earned (had taxable income of) $71,950 in 2005 (and assume double that or taxable income of $143,900 on a joint return):

 

If married, their joint return
tax would be:

$30,024


If single, each would owe
$14,325, a total of

$29,306

 

_________

The marriage penalty is

$718
 

=========


The marrieds pay $718 more because they pay at a 28% rate on part of their income, while the singles both pay at a top rate of only 25%. At the high end, if each spouse had taxable income of, say, $326,450 (total of $652,900), the couple would pay $13,123 more tax than if each was single.

In addition to the marriage penalty caused by the rate structure, other Code provisions also have the effect of penalizing married taxpayers. These penalties don't apply to everyone, or in every year, but they still mean more tax when they do hit. (Congress has also provided for some future relief from some of these penalties, as noted below.) Here's a list of some of the more common marriage penalties:

Quicker loss of itemized deductions: A married couple starts to lose their itemized deductions when their total combined adjusted gross income for 2005 exceeds $145,950. If single, each could earn $145,950 (total of $291,900) before losing any itemized deductions. (However, the itemized deduction phase-out is scheduled to be gradually reduced beginning in 2006 and completely eliminated after 2009, thus eliminating this aspect of the marriage penalty.)

Quicker loss of personal exemptions: A married couple starts to lose their personal exemptions at combined adjusted gross income of $218,950. If single, each could have adjusted gross income of $145,950 (total of $291,900). (However, the exemption phase-out is scheduled to be gradually reduced beginning in 2006 and eliminated after 2009, thus eliminating this aspect of the marriage penalty.)

Lower capital loss deduction: A married couple can deduct capital losses up to $3,000 total. The same two persons, if single, could deduct a total of $6,000 ($3,000 each).

Reduced passive activity loss deduction for active rental real estate owner: A married couple who actively participate in renting out real property can deduct up to $25,000 of loss from the activity, if their modified adjusted gross income is $100,000 or less. If single, each would get an up to $25,000 deduction (up to $50,000 total) and each could earn $100,000 ($200,000 total).

On the other hand, tax can be somewhat lower—a marriage bonus—for some marrieds filing jointly than if they were single, where there is a wide discrepancy in their earnings. There is no universal rule.

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