Common tax knowledge used to dictate that two people paid more taxes when they filed as a married couple—the so-called infamous “marriage penalty.” The Tax Cuts and Jobs Act slightly mitigated the penalty, with widened tax brackets and a raise in the standard deduction for joint filers. But for wealthy clients, tax traps for married couples remain.
The marriage penalty is rooted in a progressive tax system, the idea “that those who make more pay more,” said Richard Kollauf, vice president and director of business advisory and estate planning with BMO Private Bank in Milwaukee. “It’s because of this that when a married couple of equal incomes used to file jointly—that is, treat their union as a single taxpayer—they could be penalized by being taxed higher. Taxing the family as a unit as opposed to taxing the individuals is designed to ensure that households with the same income pay the same amount of income taxes, regardless of who earns the income.”
Gene Bell, president and CEO of Gene Bell & Associates in Bellingham, Wash., said, “Prior to the TCJA, the marriage penalty was easily identifiable in the tax brackets and the income levels that placed individuals filing MFJ (married filing jointly) in the penalty box.”
The recent tax reform help ease the sting of the marriage penalty bracketing by such methods as increasing a bracket’s starting threshold for "married filing jointly" or doubling the standard deduction for MFJ over ingle filers.
In some cases, instead of a marriage penalty, taxpayers can actually see a marriage bonus.
Let’s say a single taxpayer with $40,000 of taxable income in the 22 percent bracket and another single taxpayer with $240,000 of taxable income in the 35 percent bracket—representing a combined tax obligation of $63,852—marry. The $280,000 of taxable income would fall in the 24 percent bracket, for a combined tax of $55,549 under 2019 rates, Kollauf said.
“The marriage penalty used to be found when taxpayers of equal income married," he said. "A marriage bonus can now happen when taxpayers of disparate incomes marry. Prior to marriage, the higher-income taxpayer has a higher level of taxation than the lower-income taxpayer. After marriage, their combined income bracket could actually be lower than the higher single taxpayer’s [pre-marriage] bracket.”
“The TCJA eliminated the marriage penalty in the tax brackets for most taxpayers, [but] taxpayers in the top two tax brackets will still pay more as a married couple,” added Naomi Ganoe, managing director and private client service practice leader in the Akron, Ohio, office of CBIZ MHM.
“A single taxpayer reaches the 35 percent bracket if they have between $200,000 and $500,000 in income. A married couple reaches the 35 percent bracket between $400,000 and $600,000,” she said. “The threshold where a married couple starts at the 35 percent bracket is double that of a single taxpayer, [but] the ending income threshold is far from double. This continues into the 37 percent bracket. For the marriage penalty to not exist within the tax brackets, a married couple’s income should be double the single income.”
Other related tax traps still abound for wealthy clients. Capital gains and the net investment income tax still have embedded marriage penalties, mostly impacting wealthy taxpayers, according to Kollauf.