The voices of Tax Policy Center's researchers and staff
Marriage—or non-marriage—can affect how much tax you pay to Uncle Sam. Ever since Congress created the joint filing status for married couples in 1948, many couples have enjoyed “marriage bonuses” and paid less tax as a couple than they would pay if they weren’t married. In the late 1960s, Congress undid some of those bonuses by narrowing tax brackets for couples relative to those for single filers, thereby creating “marriage penalties”—higher taxes for some couples than what they’d pay as singles. Since then, creation of the head of household filing status and phaseouts for many credits and deductions have complicated the situation, often increasing penalties or reducing bonuses.
The alternative minimum tax (AMT) can create large marriage penalties for high-income couples, reversing bonuses in the regular income tax. That situation results in large part from setting the AMT exemption, phaseouts, and tax brackets for couples to less than twice those for single filers. The 2010 exemption for couples is $72,450, only a little more than half again the $47,450 exemption for singles. Those exemptions phase out starting at $112,500 for singles and $150,000 for couples, reducing the value of the exemption relatively sooner for couples. And both groups face the same tax brackets—a 26 percent tax rate on the first $175,000 and 28 percent on any excess, again hitting couples.
Let’s look at a few examples.
Consider a childless couple with very different incomes, which usually yields a marriage bonus. The husband earns $225,000, gets $25,000 of qualified dividends, pays $20,000 in state taxes and $24,000 in mortgage interest, and gives $5,000 to charity. The wife earns $25,000.
Unmarried, the couple would pay $46,246 in regular income tax and the higher earner would pay an additional $3,483 in AMT, so their two tax bills would total $49,729 (see first column of table). Filing jointly, the couple would pay $44,830 in regular tax and $2,159 in AMT. They get a $2,741 marriage bonus, $1,417 from the regular tax and $1,325 from the AMT.
Now suppose that earnings are less unequal, split $150,000 and $100,000, with everything else the same. Their tax situation flips (column 4). Their total regular tax and total AMT would both drop if they were single. Their marriage bonuses would become penalties—$1,021 in regular tax and $1,825 in AMT—yielding a $2,846 marriage penalty.
Adding children to the equation makes things worse. Single parents can file as heads of household, giving them wider tax brackets and lowering their basic taxes. They also benefit from the child tax credit (CTC) and the earned income tax credit (EITC) if they don’t earn too much. Marriage and the consequent combining of incomes can shrink or eliminate those credits because of phaseouts. And because the AMT denies dependent exemptions, it hits families harder than the childless. Let’s see what happens when the mother has children. (Giving the kids to higher-earning Dad erases tax credits but cuts pre-credit tax liability.)
With two children and the wider income split, the regular tax marriage bonus grows to more than $2,000 but a $719 AMT penalty and loss of $5,235 in CTC and EITC turn that into a $3,858 marriage penalty (column 2). Adding three more kids more than doubles the regular tax bonus but the AMT penalty and credits lost more, increasing the overall penalty to $6,352 (column 3).
Children have greater effects when spouses have more similar incomes. With the $150,000-$100,000 earnings split, two children triple the regular tax penalty, double the AMT penalty, and, in combination with loss of the CTC, push the marriage penalty over $7,600 (column 5). Five kids kick the penalty above $12,500 (column 6).
In many ways, the tax code is family friendly, offering tax benefits to married couples, particularly those with children. But credit phaseouts and the AMT can impose significant marriage penalties or, in the case of the AMT, generate bonuses.
Those issues are just one more compelling argument for comprehensive tax reform that simplifies the federal income tax.
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