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The Marriage Penalty
Tax and Financial News
May 2000
The Marriage Penalty
The Marriage Penalty - The High Cost of True Love
What is a "penalty"?
If you check the Merriam-Webster Dictionary, you might get an answer like:
1. Punishment for crime or offense, or
2. Something forfeited when a person fails to do something agreed to, or
3. Disadvantage, loss or hardship due to some action.
If you read the Internal Revenue Code, it is clear to see the U. S. Congress took definition 3 to heart when it comes to marriage. It did so in the form of what has come to be called the "marriage penalty".
Now I know many single people find it hard to believe Congress would create a tax system that punishes people for being married, particularly in this family friendly era, but they did. I know because I was one of those single people who thought the claim of a marriage penalty was silly.
Then, I married. I lived in wedded bliss for almost a year before I was hit by the harsh reality of the "marriage penalty". And it hurt.
To illustrate the marriage penalty, let me tell you a tale of the CPAs four best friends - Taxpayers A, B, C and D.
Taxpayers A and B are married and each make $50,000 per year. Between the two of them, they had $20,000 in Federal withholdings and $2,000 in State withholdings in 1999 and their filing status was married, filing a joint return. On April 17, 2000 they came in to see their favorite CPA and, to their dismay, found their total tax bill was $18,855. To their great delight, though, they found they actually had a refund due of $1,145.
Taxpayer C and her brother, Taxpayer D, visited the same CPA later that day. All the facts about their situation, including the fact they are all terrible procrastinators, are the same as A and B. The only difference is they file as single taxpayers. Although they were depressed that they each had a $8,686 tax bill, they cheered up when they found their refund totaled $1,314 each. Put another way, on the exact same earnings, C and D paid $1,483 less than A and B.
Depending on your deductions and income tax brackets, the difference can be higher or lower. The Congressional Joint Committee on Taxation, however, estimates married couples, on average, pay about $1,400 - $1,500 more in taxes than similarly situated singles.
This, then is the marriage penalty - if you marry, in most instances you will pay a higher rate of tax than if you and your spouse had remained single. According to the Congressional Record, there can also be a marriage "bonus", but none of our clients have been fortunate enough to have this experience.
Now that you know more about the "marriage penalty", what good does it do you?
If you are already married, the truth is, not very much unless you can rewrite the tax code. Fortunately, you are in luck, because you have the ability to do just that. More on that later.
If you are not married, but plan to do so, you may want to examine the timing of your plans closely.
Now, don't get the wrong idea. Marriage and family made this country great and I would never attempt to talk someone out of the right marriage, but, as in all things in life, timing is key.
Take for instance a couple that married on December 31, 1999. I am sure it had great sentimental value, but if they were in the same position as our four friends A, B, C and D, that sentimentality cost them $1,483. Had they waited until January 1, 2000 they would have had more money to spend on the honeymoon.
While many times timing should not, or cannot, be changed, sometimes momentous life events can be planned to your advantage. When you are faced with a major decision, don't forget we are here to talk things over and help you make the right financial move.
So how can you rewrite the tax code?
Well, you can't, but your Senators and Representatives can. Right now, there is a bill before Congress that will curtail the marriage tax penalty to some extent. The House of Representatives has passed a bill and the Senate is now debating the bill.
If you are married, look up your representatives address at the following website address. http://congress.nw.dc.us/congressorg/search.html Then e-mail them and let them know how you feel about the marriage tax penalty. If you are not married, think about what it would be like if you were married. Then let your representative know how you feel about the marriage tax penalty.
So, what is a penalty. We all know what it is, but should it really apply to marriage?
What is a "penalty"?
If you check the Merriam-Webster Dictionary, you might get an answer like:
1. Punishment for crime or offense, or
2. Something forfeited when a person fails to do something agreed to, or
3. Disadvantage, loss or hardship due to some action.
If you read the Internal Revenue Code, it is clear to see the U. S. Congress took definition 3 to heart when it comes to marriage. It did so in the form of what has come to be called the "marriage penalty".
Now I know many single people find it hard to believe Congress would create a tax system that punishes people for being married, particularly in this family friendly era, but they did. I know because I was one of those single people who thought the claim of a marriage penalty was silly.
Then, I married. I lived in wedded bliss for almost a year before I was hit by the harsh reality of the "marriage penalty". And it hurt.
To illustrate the marriage penalty, let me tell you a tale of the CPAs four best friends - Taxpayers A, B, C and D.
Taxpayers A and B are married and each make $50,000 per year. Between the two of them, they had $20,000 in Federal withholdings and $2,000 in State withholdings in 1999 and their filing status was married, filing a joint return. On April 17, 2000 they came in to see their favorite CPA and, to their dismay, found their total tax bill was $18,855. To their great delight, though, they found they actually had a refund due of $1,145.
Taxpayer C and her brother, Taxpayer D, visited the same CPA later that day. All the facts about their situation, including the fact they are all terrible procrastinators, are the same as A and B. The only difference is they file as single taxpayers. Although they were depressed that they each had a $8,686 tax bill, they cheered up when they found their refund totaled $1,314 each. Put another way, on the exact same earnings, C and D paid $1,483 less than A and B.
Depending on your deductions and income tax brackets, the difference can be higher or lower. The Congressional Joint Committee on Taxation, however, estimates married couples, on average, pay about $1,400 - $1,500 more in taxes than similarly situated singles.
This, then is the marriage penalty - if you marry, in most instances you will pay a higher rate of tax than if you and your spouse had remained single. According to the Congressional Record, there can also be a marriage "bonus", but none of our clients have been fortunate enough to have this experience.
Now that you know more about the "marriage penalty", what good does it do you?
If you are already married, the truth is, not very much unless you can rewrite the tax code. Fortunately, you are in luck, because you have the ability to do just that. More on that later.
If you are not married, but plan to do so, you may want to examine the timing of your plans closely.
Now, don't get the wrong idea. Marriage and family made this country great and I would never attempt to talk someone out of the right marriage, but, as in all things in life, timing is key.
Take for instance a couple that married on December 31, 1999. I am sure it had great sentimental value, but if they were in the same position as our four friends A, B, C and D, that sentimentality cost them $1,483. Had they waited until January 1, 2000 they would have had more money to spend on the honeymoon.
While many times timing should not, or cannot, be changed, sometimes momentous life events can be planned to your advantage. When you are faced with a major decision, don't forget we are here to talk things over and help you make the right financial move.
So how can you rewrite the tax code?
Well, you can't, but your Senators and Representatives can. Right now, there is a bill before Congress that will curtail the marriage tax penalty to some extent. The House of Representatives has passed a bill and the Senate is now debating the bill.
If you are married, look up your representatives address at the following website address. http://congress.nw.dc.us/congressorg/search.html Then e-mail them and let them know how you feel about the marriage tax penalty. If you are not married, think about what it would be like if you were married. Then let your representative know how you feel about the marriage tax penalty.
So, what is a penalty. We all know what it is, but should it really apply to marriage?
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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