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Taxation and the Family: What are marriage penalties and bonuses?

Couples face a marriage penalty when they pay more income tax filing jointly as a married couple than they would if they had remained single and filed separately as individuals. Conversely, a marriage bonus occurs if a couple pays less tax filing jointly than they would if they were single. Under a progressive income tax, marriage penalties and bonuses arise because the household rather than the individual is the unit of taxation. Tax provisions that phase in or phase out with income also produce penalties or bonuses. Many more married couples receive bonuses than incur penalties.

  • Marriage penalties and bonuses result from the combination of progressive tax rates and taxation of a married couple as a single tax unit. With progressive taxes (which impose higher rates on higher incomes), combining spouses’ incomes can result in some income being taxed at higher rates than if spouses’ incomes were taxed separately. That can occur only if joint tax brackets are less than twice as wide as individual brackets. (A couple does not have to file a joint tax return but their alternative-filing separately as a married couple-almost always results in greater tax liability.)
  • Couples in which spouses have similar incomes are more likely to incur marriage penalties than couples where one spouse earns most of the income, because combining incomes in joint filing can push both spouses into higher tax brackets.
    • Example of a marriage penalty: A husband and wife with two children earn $100,000 each and itemize deductions totaling $40,000. Filing jointly, their taxable income is $146,801, on which their 2008 income tax liability is $27,848. But the alternative minimum tax (AMT) raises that liability to $30,825. If they could file separately as single and head of household with two children, the single filer would owe a tax of $15,469 and the head-of-household filer would owe $10,438, or a total of $25,906, and they would not be subject to the AMT. Their joint tax bill is thus $4,919 higher than the sum of their individual tax bills, imposing on them a marriage penalty equal to 2.5 percent of their pretax income.
      (see example details)
  • Couples in which one spouse earns all of the couple’s income never incur a marriage penalty and almost always receive a marriage bonus, because joint filing shifts the higher earner’s income into a lower tax bracket.
    • Example of a marriage bonus: A wife earns $200,000 and her husband earns nothing. They have two children and itemize deductions equal to $40,000. Filing jointly, their taxable income is $146,801, on which their 2008 income tax liability is $27,848. But the AMT raises that liability to $30,825. If they could file separately, the husband as single and the wife as head of household with two children, the wife would owe taxes of $38,957 (including the AMT) and the husband would owe nothing. Their joint tax bill is $8,132 less than their combined individual tax bills, giving them a marriage bonus equal to 4.1 percent of their pretax income.
      (see example details)
  • Before the 2001 tax act, married couples were already significantly more likely to get bonuses than penalties. The Congressional Budget Office estimated that 51 percent of married couples received marriage bonuses totaling nearly $33 billion in 1996, and 42 percent incurred marriage penalties totaling almost $29 billion.
  • Tax legislation since 2001 has substantially reduced marriage penalties and increased marriage bonuses, by raising the standard deduction for couples to twice that for single filers and by setting the income ranges of the 10 and 15 percent tax brackets for couples to twice the corresponding ranges for individuals. Legislation also raised the starting point for the earned income tax credit (EITC) phase-out range by $3,000 for married couples.
  • Marriage penalty relief is costly. TPC estimates that extending the marriage penalty reductions from their scheduled sunset in 2010 through 2017 would cost more than $130 billion in tax revenue. Much of the cost results from raising marriage bonuses.
  • Much of the benefit of marriage penalty relief goes to the wealthiest taxpayers. TPC estimates that marriage penalty tax cuts will increase after-tax income in 2010 by 0.66 percent for the average taxpayer in the top income quintile, but by only 0.24 percent for middle-quintile taxpayers (see figure).
  • Despite the recent reductions, many aspects of the tax code perpetuate penalties. Joint filer brackets for tax rates above 15 percent are less than twice as wide as single brackets, and therefore combining income for joint filing can lead to higher tax rates. In fact, the 35 percent bracket starts at the same level of taxable income for single filers, joint filers, and heads of household and imposes significant marriage penalties on high-income couples. In addition, income limits on some tax subsidies are less than twice as high for couples as for single filers. For example, the child tax credit starts to phase out for unmarried filers when adjusted gross income exceeds $75,000; for married couples filing jointly, the threshold is $110,000, which is less than twice the single filer’s threshold and can thus cause marriage penalties for some taxpayers. Finally, AMT parameters for couples are less than twice those for unmarried individuals. For example, the 28 percent AMT bracket starts at $175,000 for both single and joint tax filers.
  • Taxpayers who might qualify for the EITC can suffer particularly large marriage penalties if the income of one spouse disqualifies the other from getting the credit. However, marriage can increase the EITC if a nonworking parent marries a low-earning worker.
    • Example of a marriage penalty due to the EITC: A husband and wife with two children earn $20,000 each and claim the standard deduction of $10,900. Filing jointly, their taxable income is $15,100, on which their 2008 income tax liability is $1,510. They qualify for an EITC of $347 and a child credit of $2,000, yielding a net refund of $837. If they filed separately, the wife as a head of household with two children and the husband as single, the wife would have a tax bill of $150 minus an EITC of $3,927 and a child credit of $1,343, for a net refund of $5,119. The husband would owe $1,256 with no offsetting credits. Their separate tax bills would thus yield a combined net refund of $3,863, and so they incur a marriage penalty of $3,026, or 7.6 percent of their pretax income.
      (see example details)
  • Marriage penalties are not confined to the tax system. Married couples often receive lower benefits from government programs than they would if they had not married.
 
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