IRS "Marriage Penalty" is alive and good – but only for those servants – The Motley Fool
Controversial, although tax clauses and employment law, or TCJA, fulfilled their goal of simplifying parts of the tax code – including the infamous "marriage punishment" which left couples with similar income that paid more in personal tax than they would have if they had not said "I do."
However, the new rules have not completely disappeared with the connubial cost. In fact, the marriage punishment is alive and beneficial in the recently edited tax code – but only if you are among the biggest income earners.
Source: Getty Images.
How has the marriage punishment changed ̵[ads1]1; and will it affect you?
Under the old tax code, married couples with similar personal income will end up paying more in total tax than they would if they had filed separately. For example, if both people earned $ 150,000 a year, they would each rinse $ 41,616.25 if it was filed separately, or a total of $ 83,232.50. However, when joining the community, the tax rate will climb to $ 87,039.00 – a difference of $ 3,806.50.
Under TCJA, personal income tax is substantially simplified. A look at the IRS taxonomy set shows that taxable income amounts to common files line up nicely with the singles: each range is easily doubled. So if you and your spouse both get $ 150,000 this year, you get the same marginal income tax rate of 24% you would have if you were single.
Here you see the brakes.
| Price [19659010] Income Range, Single Files | Income Distribution, Common Files | |||
|---|---|---|---|---|
| 10% | $ 0- $ 9.525 | $ 0- $ 19.050 | ||
| 12% | $ 9,526- $ 38,700 | $ 19,051- $ 77,400 [19659015] 22% | $ 38,701- $ 82,500 | $ 77,401- $ 165,000 |
| 24% | $ 82,501- $ 157,500 | $ 165,001- $ 315,000 | ||
| 32% | $ 157,501- $ 200,000 | $ 315,001- $ 400,000 | ||
| 35% | $ 200,000- $ 500,000 | $ 400,001- $ 600,000 | ||
| 37% | About $ 500,000 | About $ 600,000 |
Data Source: IRS.
The last two parentheses get a little hinky, though. You will see that the common filing income threshold stops following the simple exchange rate pattern established at the top of the table, meaning single filers have a little more wiggle room to earn more income and still pay taxes on the lower 35% rate.
So if you earned $ 500,000 this year and filed on your own, you would blame the federal government $ 150,689.50 – it's $ 45,689.50 plus 35% of the amount over $ 200,000. If you and your non-engaged partner each earned so much, you would pay a collective $ 301,379 to Uncle Sam.
But if you and your spouse both earned $ 500,000 and filed jointly, your total taxable income would be $ 1 million – well over $ 600,000 threshold for 37% rate. You owe $ 309,379, which means that the marriage penalty will cost you an extra $ 8000.
An Extra Hicclock: Detailed Deduction
Most of us do not earn extraordinary levels, so we do not have to worry about marital punishment on income tax. But the new code still contains a hitch for those who are hitched, even though they are average earners.
TCJA limits personal deductions for state and local taxes to a total of $ 10,000 per taxpayer per year – regardless of whether you archive individually or jointly. So if you're married, you give up an additional $ 10,000 in possible deductions that you could have done if you had kept things divorced.
If the New Marriage Penalty affects at least, you know that your money helps the government to increase revenue and finance other TCJA tax deductions. Of course, it may or does not give you any comfort when it's time to pay off.
