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Few people marry or divorce to change their tax status, but the federal income tax code does treat married couples and single people differently. Each group has its own tax brackets, standard deductions, credits, and phaseouts. As a result, two people can face very different tax bills if they are married and file jointly than if they are single and file either as individuals or heads of household. Couples who pay more than singles bear a “marriage penalty.” Those who pay less enjoy a “marriage bonus.”
Bonuses occur because couples pay tax on their combined income, no matter how much each spouse earns. If you’re married, in a progressive tax system like ours, taxing combined incomes rather than separate ones lowers your tax bill if you and your spouse have substantially different earnings. With tax brackets for couples exactly twice as wide as those for single people (and other tax provisions applying equally), a couple’s tax bill can be no greater than what they’d pay as individuals. Either they’d pay the same tax as two individuals or get a marriage bonus.
But tax brackets for couples aren’t all twice as wide as those for singles. Before the 2001 tax act passed, tax brackets were 67 percent wider for joint filers than singles. As a result, couples often paid more tax than if each spouse paid at singles’ rates on half their combined income. Thus, spouses with incomes in the same ballpark still paid marriage penalties.
Debate over the 2001 tax act riveted attention on marriage penalties. It was wrong, some policymakers asserted, to tax married folks more than those who—as people said when I was much younger—“live in sin.” The 2001 law tried to fix this by setting both the standard deduction and the widths of the 10-percent and 15-percent brackets for couples equal to twice those for single taxpayers. But Congress it didn’t fix the problem for the other four tax brackets. In particular, the 35-percent top rate began at the same level of taxable income for joint, single, and head of household filers. And nothing was done about other provisions that affect singles and couples differently.
Two years later, President George W. Bush proclaimed that “My tax relief package eliminated the marriage penalty [in the federal income tax].” The act did spell relief for many couples, but it hardly eliminated the penalty. Still on the books: the enormous penalties that the earned income tax credit (EITC) levies on low-income couples with children and the penalties that occur when tax benefits phase out over income ranges for couples that are less than twice those for single taxpayers. And marriage penalties live on in the basic tax structure because the higher brackets for joint filers are less than twice as wide as for single filers. Couples in which each spouse would have the same taxable income if they filed individual tax returns can pay up to $15,000 more than if they were single (see graph).
Most couples won’t feel this pinch from the tax brackets: Only those whose taxable income exceeds $137,300 would face a higher tax bill by getting married. Just one-quarter of couples have income that high, and many of those have earnings divided unequally between spouses. But for those power couples where each spouse earns about the same, the penalty rises quickly. Their taxes can go up by as much as 9 percent when their taxable income approaches $350,000.
Marriage penalties lurk elsewhere in our tax code as well. Stay tuned for TaxVox posts on the EITC and phaseout ranges, which can also penalize couples. Also, later this year TPC will dig into the details of marriage penalties and bonuses.
But we don’t need much analysis to conclude that marriage penalties remain very much part of our current federal income tax.
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