It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
M is for Marriage Bonus & Marriage Penalty.
Our Tax Code is progressive which means that the rates rise as income increases. Each taxpayer pays the same rate of tax for the same taxable income (income figured after deductions, exemptions, exclusions and other adjustments) at each level. That means, for example, that all single taxpayers with taxable income from zero dollars to $9,225 are taxed at 10% in 2015. All single taxpayers with taxable income from $9,226 to $37,450 are taxed at 15% in 2015 and so on. For more on marginal and effective tax rates, click here.
There is, however, a significant exception to the rule that each taxpayer pays the same rate of tax for the same taxable income: married taxpayers.
When taxpayers combine their incomes and deductions, there is generally a change in their total tax bill (as compared to filing as two single people).
If that change is in the married couple’s favor, it’s called a marriage bonus. This tends to happen when two people with differing incomes get married (or, most notably, when one taxpayer does not work). That’s because the additional income (or none at all if one of the taxpayers does not work) is not generally enough to move taxpayers into a higher tax bracket – but is instead combined with wider brackets for married couples and a potentially higher standard deduction. The result? A lower overall tax rate.
If that change is not in the married couple’s favor, it’s called a marriage penalty. This tends to happen when two people with relatively equivalent incomes get married. That’s because the additional incomes combine to push taxpayers into a higher tax bracket – and may subject the couples to certain provisions which limit tax breaks, like the alternative minimum tax (AMT) and Pease limitations. Higher combined incomes can also push taxpayer income into phase-out ranges – you see this a great deal at the lower end of the income spectrum with the Earned Income Tax Credit (EITC) and the Child Tax Credit. Additionally, some deductions, like the student interest deduction, are capped by a fixed number regardless of marital status.
It’s even worse for some married taxpayers who elect to file as married filing separately (MFS). While the MFS filing status may be advantageous in certain circumstances, more often than not the limits and restrictions on claiming certain tax preference items result in a higher overall tax rate. For more on filing status, click here.
The existence of a marriage bonus tends to be a good thing for the institution of marriage.
But the marriage penalty? It tends to discourage some couples from taking the plunge. And those that do? It appears that when the marriage penalty is steep enough, it influences whether both spouses will work and if so, how much both spouses will work.
