Does Being Married Cost You More Than Being Single?

This Week's Quote:

“Positive thinking will let you do everything better than negative thinking will.”

                                  -Zig Ziglar, Author

Here, we are discussing income taxes.  Do you pay more or less income tax being married?  Or, being single?  Hmmm…well, it depends.  There are no easy answers in the tax world.

To make a long story, short – the so-called marriage penalties or marriage bonuses “generally occur when certain tax brackets and/or tax deductions for married couples aren’t twice the same amount for single taxpayers.”  These marriage penalties or bonuses occur in numerous sections of the Internal Revenue Code (IRC).  I cannot always explain why.  Occasionally, the IRS or Congress will attempt an explanation which often makes little to no sense. 

These tax distortions associated with a taxpayer’s filing status have been around as long as I have been doing income tax returns.

One rule of thumb is that if both spouses have about the same income, then being married will cost you more in taxes than if you were both single.  And, if one spouse has significantly more income than the other, then the combined income taxes will be less. 

Getting married late in the year for couples with each having about the same income as the other can cause the joint income tax bill to be significantly higher than if the wedding was postponed from New Year’s Eve to New Year’s Day.  Yes, that sounds unromantic but I didn’t write the tax code.
 
Side note: Anyone getting married should have their tax withholdings and/or income tax estimates re-evaluated to avoid any potential April 15th nasty tax surprises. 
 
On November 28, 2022, the WSJ published an article by Tom Herman titled, “Taxes After Marriage: Do You Get a Bonus or a Penalty?  How to Tell Where You Land.  Credit given to Mr. Herman for some ideas and comments.
The article is reprinted below for your reading enjoyment.

 -Mark Bradstreet

Getting married may produce unexpected changes in your taxes.

Some two-income couples may owe more in taxes—solely because they get married—than they would on a combined basis if each remained single. As unromantic as this may sound, some couples planning to get married this month or next might discover that postponing the official ceremony until 2023 could result in a significant tax savings for this year. But in other cases, some couples who get married may discover they owe less on a combined basis than if they were still single.

These strange tax-law twists long have been known as the marriage penalty and the marriage bonus. They continue to exist in many cases and in widely varying degrees despite tax changes enacted in 2017 that included important relief for millions of married couples. Marriage penalties “generally occur when various tax provisions—exclusions, deductions, credits, and tax brackets—for married couples aren’t twice the comparable amounts for single filers,” say Chenxi Lu and Janet Holtzblatt on the Urban-Brookings Tax Policy Center website.

The penalty can be especially large for some high-income couples where each has large and roughly similar amounts of income, but it can also hit lower-income taxpayers. And many tax provisions can play a role in the size and extent of the penalty, says John Buchanan of Wolters Kluwer Tax & Accounting U.S. Here’s a look at some of them: 

Deductions and other factors

Tax brackets: The 37% federal income-tax bracket for married couples filing jointly isn’t twice as large as the bracket for singles, says Stephen W. DeFilippis, owner of DeFilippis Financial Group, a wealth management and tax firm in Wheaton, Ill., and also an enrolled agent, which means he is authorized to represent taxpayers at all levels at the IRS. For the 2022 tax year, the top federal income-tax rate of 37% applies to singles with incomes greater than $539,900. For married couples filing jointly, it applies with incomes greater than $647,850.
 
Tax credit: Low-income workers may get hit by a marriage penalty because of the intricacies of the earned-income tax credit, or EITC, says Mr. DeFilippis. This complex provision was designed to help large numbers of lower-income workers and families. 

Net capital losses: With stock prices down so far this year, many investors may have larger realized capital losses than their realized capital gains. In that case, they typically can deduct as much as $3,000 a year of their net capital losses ($1,500 if married and filing separately) from wages and other income. That $3,000 limit is the same for singles and joint filers. Thus, two singles could deduct net capital losses of as much as $6,000, while joint filers are limited to as much as $3,000.

SALT deduction: For taxpayers who itemize their deductions, the maximum state and local tax (SALT) deduction is $10,000 for both joint filers and singles. So, two singles could deduct as much as $20,000, but joint filers are limited to $10,000. (For those married but filing separately, it’s $5,000 each.) This can be especially important for couples who itemize and live in high-tax areas, such as New York City, California and New Jersey.

Social Security: The base amount for calculating the taxation of Social Security benefits is $25,000 for unmarried taxpayers and $32,000 for married couples filing jointly, according to Mr. Buchanan of Wolters Kluwer.

Other zingers: The tax hit on married couples also can be affected by the limits on mortgage-interest deductions as well a 3.8% net investment income tax that applies to many upper-income investors. 

Location: Where you live can also play a role in how married couples are taxed, says Janelle Fritts, policy analyst at the Tax Foundation in Washington, D.C. Many states have marriage tax penalties embedded in their tax systems, she says. For more, see her report entitled: “Does Your State Have A Marriage Penalty?” 

Filing status

Married couples can choose to file jointly or as “married individuals filing separate returns” from their spouse. Most married couples file jointly because that’s usually more beneficial for tax purposes. Filing separately from your spouse may be beneficial in certain circumstances, including if one spouse has significantly lower income than the other and has very large medical-expense deductions. Filing separately also may be a smart move if you suspect your spouse is a tax cheat and you don’t want to be held responsible for that person’s taxes, says Bryan Skarlatos of the Kostelanetz LLP law firm in New York City.

How might a couple owe less because of marriage?

The answer again varies widely and depends on the details of each case. But one example would be a couple where one spouse has far more income than the other, or where one spouse took home all the income, Mr. Buchanan says. He offers this hypothetical example: Suppose one taxpayer has income this year of $170,000 and the other has $30,000. If married and filing jointly, they would owe about $3,800 less than they would if each had remained single, he says.

The bonus can be much larger in other cases, says Mr. DeFilippis. For example, consider a hypothetical case in which one person has $200,000 of wage income for this year and the other has zero. The marriage bonus would be about $10,550, he says. “Typically the more disparate the income between the two, the larger the marriage bonus,” he says.

Series I savings bond update: Treasury Series I savings bonds, which are government-guaranteed and offer important tax advantages, still look attractive even though the recently reset rate isn’t as high as it was previously. The Treasury recently announced that the initial annualized rate on new Series I savings bonds sold from November of this year to April 30 of next year is 6.89%. I wrote about this subject earlier this year. For more details, see the Treasury’s website.

Charitable-giving reminder: Stop procrastinating if you are thinking of taking advantage of a popular technique known as a qualified charitable distribution. Friends have reminded me that it can take more time to execute than you may think. In a typical case, an investor age 70½ or older can transfer as much as $100,000 a year directly from a traditional IRA to qualified charities without having to include the transfer as income. (Caution: Donor-advised funds aren’t considered qualified for this provision.) The transfer counts toward a taxpayer’s required minimum distribution for that year.

Make sure the transfer goes directly to the charity, not the IRA owner, says Eric Smith, an IRS spokesman. The IRS recently issued a helpful summary on the subject.

Credit Given to: Tom Herman. Published November 28, 2022 in the Wall Street Journal.
 
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
 
This Week’s Author, Mark Bradstreet