What to Know About the Marriage Tax Penalty

What to Know About the Marriage Tax Penalty

PRIOR TO THE PASSAGE OF the Tax Cuts and Jobs Act of 2017, some newly married couples received an unpleasant surprise at tax time. Spouses who earned similar amounts of money – especially those considered high earners – often found themselves subject to a marriage tax penalty.

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“The marriage tax penalty means that when you’re married, you lose some of the tax benefits you’d have if you were single,” says Elizabeth Lindsay-Ochoa, director at accounting firm CBIZ MHM New England. Specifically, the pre-2018 tax brackets meant spouses were often in a higher tax bracket than if they were single with the same income.

“After the tax (reform) passed, the marriage penalty shrunk,” says Mela Garber, tax leader at accounting firm Anchin, Block and Anchin in New York City. However, it still exists for high earners and hasn’t been eliminated for some nuanced parts of the tax code, such as the portion of Social Security benefits that may be taxable.

“The marriage tax penalty means that when you’re married, you lose some of the tax benefits you’d have if you were single,” says Elizabeth Lindsay-Ochoa, director at accounting firm CBIZ MHM New England. Specifically, the pre-2018 tax brackets meant spouses were often in a higher tax bracket than if they were single with the same income.

“After the tax (reform) passed, the marriage penalty shrunk,” says Mela Garber, tax leader at accounting firm Anchin, Block and Anchin in New York City. However, it still exists for high earners and hasn’t been eliminated for some nuanced parts of the tax code, such as the portion of Social Security benefits that may be taxable.

2019 INCOME TAX BRACKETS RATES SINGLE FILERS TAXABLE INCOME RANGE MARRIED FILING JOINTLY TAXABLE INCOME RANGE MARRIED FILING SEPARATELY TAXABLE INCOME RANGE
10% $0 to $9,700 $0 to $19,400 $0 to $9,700
12% $9,701 to $39,475 $19,401 to $78,950 $9,701 to $39,475
22% $39,476 to $84,200 $78,951 to $168,400 $39,476 to $84,200
24% $84,201 to $160,725 $168,401 to $321,450 $84,201 to $160,725
32% $160,726 to $204,100 $321,451 to $408,200 $160,726 to $204,100
35% $204,101 to $510,300 $408,201 to $612,350 $204,101 to $306,175
37% More than $510,300 More than $612,350 More than $306,175

Where Else Does the Marriage Tax Penalty Apply?

Although people often discuss the marriage tax penalty in terms of tax brackets, it actually applies in a number of tax scenarios.

For instance, caps on some itemized deductions are the same regardless of a person’s filing status. These include the $10,000 cap on state and local tax deductions and the cap on the mortgage interest deduction, which is limited to the first $750,000 of a loan.

“Those do not slide up for married filers,” says David Snider, CEO of New York City-based Harness Wealth. Filing separately won’t give married couples double the deduction either since their deductions must be split between the two tax forms.

As another example, some taxpayers end up paying an additional Medicare tax of 0.9% if their income reaches a certain level. While the threshold for single filers is $200,000, married couples will start paying the tax when their income hits $250,000.

Married couples who receive the Earned Income Tax Credit are also subject to income limits that are far less than double those applied to single taxpayers. “That’s a painful one if you’re a low or moderate income earner,” Lindsay-Ochoa says.

For the 2019 tax year, single filers with three children can have incomes up to $50,162 and receive the Earned Income Tax Credit while married couples with three children must earn less than $55,952 to receive the credit.

Retirees receiving Social Security benefits also get hit with a marriage penalty. Single taxpayers may begin to pay taxes on a portion of their Social Security benefits once they have a combined income of $25,000. If there were no marriage penalty, couples wouldn’t have to begin paying taxes until their combined income hit $50,000. However, in reality, a portion of Social Security benefits for married couples can be taxed as soon as their income reaches $32,000.

Should You and Your Spouse File Jointly or Separately?

In most cases, filing separately won’t help a couple avoid a marriage tax penalty. The one time it may be beneficial is if one spouse has significant medical expenses in a particular year.

Only health care costs in excess of 7.5% of a person’s adjusted gross income may be deducted by those who itemize. “If you file separately, you might be able to take those deductions,” Sotir says. Otherwise, a couple’s combined income might make it difficult to exceed that 7.5% threshold.

Meanwhile, in homes with a stay-at-home spouse, joint filing may reap more financial benefits. “If there is one person who makes no money, they would be better off filing jointly,” Garber says.

Snider notes, “Unfortunately, there isn’t a quick and easy rule of thumb.” As you prepare to tie the knot, it makes sense to consider the tax implications of your marriage. A tax professional can help you run the numbers to see whether or not filing separately would help you avoid any potential marriage tax penalty.

 

Source:- usnews

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