Things You Need to Know About Marriage Penalty

Dec 17, 2023 By Triston Martin

The term "marriage penalty" describes the higher tax liability married filers must shoulder than single filers. While tying the knot is a personal decision, there are often significant federal and state tax repercussions. Income penalties for married couples can reach 12% for those with children and 4% for those without.

Standard deductions and wage income are assumed in this scenario. Married couples may face additional tax burdens. A higher marriage penalty is seen in couples where both partners earn about the same amount. There are marital sanctions in both the federal and 15 states. The Tax Cuts and Jobs Act reduced the marriage penalty. Marriage bonuses are more common for certain types of couples, such as those with large income gaps.

The Marital Offense and Its Meaning

There are benefits to married life. You won't ever have to eat a lonely dinner again, and you'll always have someone by your side, no matter how old you get. However, there are a few monetary pitfalls that you should be aware of before tying the knot. The "marriage penalty" is one such example.

If a couple decides to get married, they will have to pay more taxes than a single person. When a married couple files their taxes together, they avoid this fee. If a couple is subject to a marriage penalty, it could be due to several circumstances. The number of children, the parents' salaries (individual and combined), and the income gap all play a role.

The issue of discrimination based on marital status affects communities across the country. The Tax Foundation reports that the following 15 states impose a marriage penalty on residents. Because the income tax brackets for married couples filing jointly are not twice as large as the levels for single filers, this creates a marriage penalty in some states.

For the 2018 tax year and beyond, the Tax Cuts and Jobs Act (TCJA) implemented modifications that reduce the marital tax hit. For example, allowing married couples to use the full range of the single tax brackets regardless of income brought joint filing rates in line with those for single filers. Except for the highest bracket, where married filing jointly begins at less than double the single range, this is always the case.

However, due to certain clauses, the TCJA may increase the marriage tax penalty. Itemized deductions for state and local taxes (including income and property taxes) are capped at $10,000 for single and married taxpayers, respectively. Married couples typically benefit more from the standard deduction than they did when either spouse filed separately.

Exceptions and Cautions

In addition to the causes mentioned above, marriage can result in fines under certain circumstances. Here are a few of the most typical. Those Making Minimum Wage or Less

The Earned Income Tax Benefit (EITC) is a tax credit that helps those with low incomes pay less in taxes (EITC). This program offers a credit of up to $6,728 in the 2021 tax year ($6,935 in the 2022 tax year) based on a person's filing status and the number of children who can be claimed as dependents.

Marital income boosts for the low-earner can reduce or eliminate eligibility for the EITC. A married pair may have a smaller after-tax income than they would have if they stayed single.

The EITC income thresholds are not twice as for married filers compared to those of single filers. For the tax year 2021, the threshold for a single taxpayer with one qualifying child is $42,158, while the threshold for a married taxpayer with one qualifying child is just $48,108. Individuals with incomes over $200,000 and couples with incomes over $250,000 will be subject to a 0.9% Medicare surtax on earnings above those thresholds.

The tax threshold for married taxpayers is not double that for single taxpayers. Thus couples whose income is between $250,000 and $400,000 face a marriage penalty.

Net Investment Income (NII) Tax Strikes the Wealthy

Passive income such as interest, dividends, capital gains, and rental income is subject to a net investment income (NII) tax of 3.8% after deducting investment expenditures such as interest, brokerage fees, and tax preparation costs.

Profitable Investors with Large Capital Gains

Another area where the married filing jointly rate ($501,600) for the tax year 2021 is not twice the single bracket ($445,850) is long-term capital gains on investments held for more than a year. Therefore, married high-income individuals will face a marriage penalty and be subject to a 20% capital gains tax rate rather than the more favorable 15% rate if their joint income is more than $501,600.

Similarly, for the 2022 tax year, the threshold for long-term capital gains on assets for married couples filing jointly ($517,200) is not twice that for single taxpayers ($459,750). If a married couple's income is more than $517,200, the higher capital gains tax rate of 20% applies instead of the more favorable rate of 15%.

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