Today’s Fix the Tax Code Friday question is inspired by a comment on yesterday’s post from TexasEd:
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12 thoughts on “Fix The Tax Code Friday: Filing Status”
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KPE-
I think it is actually a good idea. I have always said that the “Married Filing Separately” status should be the equivalent of “Single”.
The Tax Code should not either encourage or discourage marriage via the Marriage Benefit or the Marriage Penalty. It should be marriage neutral.
The Head of Household status does provide some additional needed relief for single parents – but perhaps this could be provided by increasing the Personal Exemption amount at least for dependents.
One thought – allow a married couple to file a single return allocating the income, deductions and credits to the individual spouses (like NYS did decades ago).
TWTP
My state (Arkansas) is almost “status-free”. We do have a “joint” filing option, but it doesn’t have different tax brackets or rates. If one spouse runs a net loss (from business or whatever), then joint filing would reduce taxable income. If both spouses have taxable income, it’s usually better to file separately as the one with the lower income may save on taxes by doing so. If only one spouse has income, it won’t matter.
We do have exemptions, but they’re in the form of small tax credits, not deductions.
PS: such a proposal would never pass Congress. Republicans, of course, would object to removing the “marriage benefit” as some sort of left-wing attack on “family values” and the sanctity of marriage; Rush Limbaugh would announce that all of its supporters weren’t born in this country and Democrats would holler “What’s going to be next? The earned income credit?”
And none of them would have anything at all sensible to say about it (or about anything else).
I would be for anything that brought us closer to a flat tax!!
The only complication I could see is how would married couples file when they jointly own property, investments, etc?
Canada does it that way and they seem to manage all right. You put the spouse’s or common law partner’s name and ID on the return for cross-checking purposes, and allocate out anything jointly shared. Of course, anything Canada does must be socialist, bad and wrong 😉
I agree in principle that things would be a little easier if it were one taxpayer – one return, but I raises a problem of equity among taxpayers in different states.
Federal law follows state law to determine property rights. In community property states income and property interests are automatically shared among spouses, while in non-community property states, income and property interests of spouses are kept separate (unless specifically jointly held).
Take, for example, a married couple with one spouse making 100K a year and the other making nothing. A one taxpayer -one return rule, would be that if that couple lived in California, each spouse would be taxed on 50K of the income, but if that couple were to live in Pennsylvania one spouse would be taxed on 100K and the other nothing. With our progressive rate structure the couple in Pennsylvania would end up paying more in aggregate tax because the second 50K would he taxed at a higher rate.
This is also where the Marriage Penalty/Marriage Benefit comes into play…. If spouses with approximately equal incomes, the can actually end up paying more tax than if they were single. However, if there is a large disparity in income among spouses, they end up paying less than if they were single.
To illustrate:
Couple A, 1 makes $100K, 2 makes $0 in 2010.
Not Married – Tax on 1 = $19,091 Tax on 2 = $0 – Total = $19,091
Married Joint – Total Tax = $13,600
Married Separate – Tax on 1 = $19,504, Tax on 2 = $0 – Total = $19,504
Couple B, 1 makes $50,000, 2 makes $50,000
Not Married – Tax on 1 = $6,344 Tax on 2 = $6,3440 – Total = $12,688
Married Joint – Total Tax = $13,600
Married Separate – Tax on 1 = $6,344 Tax on 2 = $6,3440 – Total = $12,688
If the rules was one tax payer one return, the CA couple would pay a total tax of $12,688, but the PA couple would pay $19,091.
Simple isn’t always fair, and fair isn’t always simple.
(These illustration assume all income is ordinary and the standard deduction is taken).
As an aside, wealthy couples are actually more likely to take advantage of the marriage benefit than are working class families. If one spouse makes a lot of money, the other spouse is more likley to not work, to not work full time, or to volunteer. While many middle class families require two incomes just to make ends meet. — Just something to think about.
Changing to a single filing status is not an improvement. The income tax is inherently unfair. Each region in a state has different costs of living. $40,000 in Los Angeles is a very different income from $40,000 in Blythe, or Perris, or Arcadia, or Davis, or Oakland, or San Francisco,…
Trying to make the income tax “fair” by adding complexity is a false hope. The only way to make an income tax fair is to make it so small that no complex formulas for deductions are necessary and so that everyone can afford it.
It would be a real headache to have to split all the joint transactions for a married couple and file them on two returns, one per spouse! The INCREASE in paperwork would be huge!
On a different angle, there would also have to be some provision for “income splitting” or “expense shifting” … when one spouse if the primary (or only) bread winner, and the other spouse takes care of the house, raises the kids, or is totally supported by the money earner. Complications, Complications!
The existing :married filing jointly” works well for most married couples. If it isn’t broken, DON’T FIX IT!
Sorry — didn’t mean to start a big flap! My comment was in relation to the issue of same sex marriage, and I simply suggested that life would be easier if there were no filing statuses. That doesn’t mean no joint returns. People could make their own decisions on how many are included on one return, one person, one deduction. I realize it has no chance of coming true — but it sure would be nice if we didn’t have to deal with all the nuances now caused by filing status.
Hey TexasEd, don’t apologize! It was a great question and made for a wonderful Fix the Tax Code Friday!
I agree that the tax filing system is inherently unfair to singles (so what else is new). In order for a person filing as a single status to net $4000 per month, they would have to gross $2000 more per year than a person filing under married status. So, singles have to gross more than marrieds just to net the same amount. Singles need disposable income to spend (at least in this consumer-driven economy), and to invest for retirement. The government needs to stop trying to influence our lifestyles and societal choices by using the Internal Revenue Service. Very few of us really stay single or get married based on our income taxation anyway. Geez, Congress, get a clue!!
Unfair is an understatement when a newly married couple has and maintains two separate residences and two separate incomes none of which is mingled. basically his money and bills and home is all his and the same for me. but because of marriage i can no longer get hoh status which means no eic, or any other credits. he has a business and itemizes. i have no clue how much he earns or what he does with it. thats his business. we file mfs i lose all credits for which i should be entitled to as well as five hundred dollars because he itemizes. how fair is that>