President George W. Bush’s income-tax cuts reduced the marriage penalty by setting the 10 percent and 15 percent brackets for married couples at double the amount for individuals, which essentially splits a couple’s income for tax purposes, Steuerle said.
Budget Deal
The budget deal passed Jan. 1 extended marriage-penalty relief for those brackets and for the standard deduction, which is used by those who don’t itemize. While that helped married couples in the lower-to-middle income tax brackets, the law didn’t apply the same relief to top earners, Steuerle said.
“Among the people most likely to be caught by this are two professionals, highly paid doctors or lawyers,” said Steuerle, whose Tax Policy Center is funded by the Brookings Institution and the Urban Institute.
High earners with significant income from capital gains and dividends may feel a bigger tax bite because they are married.
A married couple with taxable income of $600,000 a year is subject to the top 20 percent rate because they exceed the $450,000 threshold, while if they each recognized $300,000 individually they would pay at the 15 percent rate. That doesn’t include the 3.8 percent investment-income surtax.
Early Planning
The multiple levels of higher rates mean families should start planning early this year because there are ways to save on taxes or reduce their sting.
Married couples should review their withholding to make sure they are taking out enough from their paychecks for taxes, Ventry said. The higher-earning spouse usually should be the one accounting for the family’s exemptions and any additional withholding, because they are in the higher bracket, he said.
Couples also should consider installment sales of appreciated assets such as real estate or stakes in a business, said Baker Crow, senior vice president of the private wealth management group at Regions Financial Corp. That can help spread the income received over more than one year, he said.