Getting married usually raises one's taxes

Origin of the "marriage penalty" and the actions taken to eliminate it

What became known as the "marriage penalty" originated in 1969, when Congress tried to equalize what was then an advantage for couples, as compared to single taxpayers. ^[1]

In 1996, forty-two percent of married taxpayers paid more because they were filing jointly than they would have if they had remained single, according to a 1997 Congressional Budget Office analysis^[2]. The average penalty was $1,380. ^[3]   Several pieces of legislation have been passed since the late nineties to do away with these penalties. For example, the Economic Growth and Tax Relief Reconciliation Act of 2001 introduced section 1(f)(8) to the Internal Revenue Code, which mitigates the marriage penalty effect in the lower tax brackets. ^[4] Section 1(f)(8) adjusts the ceiling of the 15-percent tax bracket for joint return filers relative to the ceiling of the 15-percent tax bracket for unmarried spouses. ^[4] The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated the benefit to joint return filers by eliminating the marriage penalty for 2003 and 2004 and the Working Families Tax Relief Act of 2004 extended the benefit to 2005-2007. ^[4] Therefore, the marriage penalty in the lower tax brackets does not exist and will not exist at least until 2010. ^[4] Unless reauthorized by Congress, however, the marriage penalty will return in 2011. ^[4] However, through passing those pieces of legislation, the tax system is now such that couples with disparate incomes will pay less tax than they would have paid as two single taxpayers. ^[4] 

The myth of the marriage penalty

"The reality is that marriage has plenty of legal and financial benefits, including tax benefits. Even before Congress changed tax rules in 2001 to deal with the so-called marriage penalty, more married couples got a tax bonus from being married than paid a tax penalty:

• 51% of married couples paid less tax jointly than if they had not been married, according to a 1996 Congressional Budget Office analysis. The average amount these couples saved: $1,300.

• 42% of married taxpayers paid more by filing jointly than they would have if they'd remained single, the office said. The average penalty: $1,380.

The people who got tax breaks by marrying were those with disparate incomes, where one spouse earned more than the other. The wider the gap between the paychecks of the husband and wife, the bigger the bonus.

The people who tended to face a marriage penalty were those with similar incomes. Typically, the more they made, the bigger the penalty they paid.

Who's really penalized: The poor

Those low-income couples still face the potential for a tax penalty, said Mark Luscombe, a principal analyst for tax research firm CCH. That's because the earned-income credit, a tax break designed to keep the working poor out of poverty, can be less for a two-earner household than for singles.

But Congress effectively eliminated the penalty for the majority of couples with its 2001 legislation, which has since been extended (but not made permanent; more on that in a minute). The standard deduction for married couples is now twice that for singles, and, for 2008, the 15% tax bracket has been widened for marrieds to $65,100, twice the limit for singles.

There's still a potential for an income-tax marriage penalty once joint incomes reach the 25% bracket, but the widening of the 15% tax bracket means that even those who pay a penalty will pay a less significant one than in the past.

The legislation eliminating the penalty for most couples is set to expire in 2010. Congress will be under plenty of pressure to make the change permanent, but that doesn't mean it will happen.

Still, even without income-tax breaks, there are plenty of financial benefits to marriage, regardless of their income-tax situation. Among them:

• Workplace health and pension benefits coverage. Though some companies offer health coverage to domestic partners, this benefit is typically taxable as income. When spouses are covered, the benefit is tax-free.

• Social Security retirement and survivor benefits. A husband or wife is entitled to one-half of the spouse's Social Security benefits and to additional benefits in the event of death.

• Lower insurance rates. Married people usually get a discount on auto insurance and may pay less for other types of insurance.

• Automatic inheritance rights. Die without a will, and your spouse gets your stuff. In many states, the surviving spouse has a legal right to at least one-third to one-half of your estate.

• Preferential estate-tax treatment. The richer you are, the better the deal this is. Essentially, estates worth more than a certain amount -- it's $2 million this year, and that will rise to $3.5 million in 2009 -- are subject to estate taxes. But this exemption amount doesn't apply to married people: You can leave an unlimited amount to a spouse without generating a penny of estate tax. In certain states, this benefit is multiplied by special capital-gains-tax treatment for homes and other assets held by married couples as community property.

A penalty still on the books

The Social Security Administration says 62% of the women over age 62 who receive benefits do so based on their husband's work records, rather than their own. A little more than half of these women didn't earn enough to qualify for payments based on their own work records. The rest opted to take half of their husbands' benefits because they were larger than the checks they could qualify for based on their own earnings.

Now, in one very real sense, these women are better off married because they benefit from their husbands' larger Social Security checks.

In another sense, they're severely penalized because all the Social Security taxes they contributed over the years essentially yield no additional benefit. They'd get the same payments if they'd never worked and paid into Social Security.

This is no small potatoes. Social Security taxes now eat up 6.2% of every worker's paycheck, up to an annual maximum of $6,324 on earnings of $102,000 in 2008, while employers contribute an equal amount.

As more women work and earn better salaries, the proportion claiming benefits based on a spouse's record may decline somewhat. But because men still earn more on average than women, this phenomenon certainly won't disappear. Given the precarious state of Social Security and political realities, this is one marriage penalty that's likely to persist."

Sources:

1. "Marriage Penalty Relief in the New Tax Law", National Center for Policy Analysis, June 26, 2003
2. "For Better or Worse: Marriage and the Federal Income Tax" Congressional Budget Office, June 1997
3. "The myth of the marriage penalty", Liz Pulliam Weston, MSN Money
4. Donaldson, Samuel A., "Federal Income Taxation of Individuals: Cases, Problems & Materials, Second Edition", page 9. Thomson West, 2007.

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