Posted by Amy L. Gordon, CPA
The marriage tax penalty or benefit occurs from a change in a couple’s tax liability as a result of marriage and subsequently filing jointly. The marriage tax penalty results when the tax burden of a married couple filing jointly is greater than that of an unmarried couple filing separately. This penalty has impacted married taxpayers since the Revenue Act of 1913. The first provision the act created, the standard deduction, provided a $3,000 deduction for single taxpayers and $4,000 deduction for married taxpayers filing jointly. This led to the first tax penalty for married couples. The head of household (HOH) status was created in 1951 resulting in preferential treatment for unmarried working parents, further magnifying the marriage tax penalty for married taxpayers with dependent children. Expanding the marriage tax penalty, the Tax Reform Act of 1969 changed the tax rate structure and the Tax Reform Act of 1975 created the earned income tax credit (EITC). As a result of each tax law change, including the most recent Tax Cuts and Jobs Act (TCJA), the marriage tax penalty has continued to be impacted.
Although many married taxpayers are affected by the penalty, there are some cases where married couples filing jointly may have a marriage tax benefit. For instance, where there is a single-earner partner or one partner has significantly greater income than the other.
The Tax Cuts and Jobs Act (TCJA) modified several parts of the Tax Code, including portions affecting the marriage tax penalty. The TCJA actually increased the penalty in certain situations, for example,
- the HOH filing status changes,
- limitations on itemized deductions for state and local taxes,
- and limitations on the mortgage interest deduction.
Conversely, due to the changes in the tax brackets, in some situations, the tax burden on a married couple filing jointly may be similar to that of two single filers combined. For instance, if both partners have equal earnings, their tax liability will be comparable to their total tax liability if filing single. Although some working married couples without dependent children may now be unaffected by the marriage tax penalty, the Tax Code continues to penalize dual-earner married couples with dependent children.
Due to the new law, while there is more equalization between a married couple filing jointly and two single filers, there is no justice provided when one unmarried partner can claim the HOH filing status. Particularly, the marriage tax penalty increased due to the combined standard deduction for unmarried couples of $30,000 ($18,000 HOH plus $12,000 single) as compared to the married filing jointly standard deduction of $24,000. The marriage tax penalty also increased as a result of the new lower marginal tax rate due to the expanded lower tax brackets provided to HOH filers. Since the law provides HOH status to unmarried parents of dependent children, it penalizes all dual-earner working parents who get married.
The TCJA limitations on the state and local tax deduction and mortgage interest deduction can significantly impact married couples filing jointly. The state and local tax deduction is limited to $10,000 on a per-return basis. Consequently, two taxpayer’s filing single or HOH have twice the deduction allowance ($20,000) relative to a married couple filing jointly ($10,000). The mortgage interest deduction is subject to a debt limit on $750,000 of mortgage indebtedness which is also on a per-return basis. Thus, a married couple filing jointly is limited to the $750,000 indebtedness while two single taxpayers are allowed interest deductions on twice the limit of indebtedness, $1.5 million. As a result of this half-debt limit, married couples may suffer a tax penalty of thousands of dollars in the first year of the loan and several thousands of dollars over the life of the loan.
There is a great deal to contemplate when getting married and it is important to consider the potential tax effects of marriage. For example, potential effects may be:
- the marriage tax benefit for dual-earning couples with no dependent children,
- the likely marriage tax penalty for couples with dependents,
- the new limitations on the state and local deductions, and
- the mortgage interest deduction.
Every individual has a unique situation so a consultation consulting with a tax advisor is key to making informed decisions. Please contact our office with any questions or for tax planning assistance.