The Marriage Penalty: 5 Reasons the Tax Code Favours the Single
When you get married, your hearts aren’t the only thing that comes together. If you decide to join your taxes in holy matrimony too, you could be sharing more of your money with Uncle Sam. If you and your spouse have similar incomes, you could be subject to the “marriage penalty,” a term for being pushed into a higher tax bracket when two incomes are joined together. Even if you are married on the last day of the year, your marital status is applied to the entire year for tax purposes. This means you need to seriously think about which box you check on your tax form. While marriage has its many joys, here are five reasons why the tax code seems to favour single filers.
It’s All About the Math
Prior to 1969, it actually paid to file jointly. Before the tax law was changed, a married couple’s income was tallied and cut and half with each spouse taxed as an individual. This meant that married couples paid less than their single counterparts. To even things out, tax tables were adjusted. As a result, couples filing jointly landed in a higher tax bracket. The Bush tax cuts helped ease the tax burden of the so-called marriage penalty, yet the math still works out in favour of the single filer if each person has a significant income.
The marriage penalty may effect itemized deductions. Under current tax laws, certain deductions are allowed only if those deductions exceed a certain portion of your AGI, or adjusted gross income. If one spouse has such a deduction, filing jointly could reduce the deductible. The percentage requirements could make it harder to claim losses that don’t meet these requirements. The greater the joint income is, the fewer the deductions you may be allowed to claim. Employer deductions such as 401(k)s aren’t affected by marriage. However, beneficiary designations may have to be adjusted. Federal law requires that your spouse be one of your beneficiaries.
If one spouse had serious tax issues before the marriage, filing jointly could create tax issues for both spouses. When you file jointly, you can’t easily separate yourself from your spouse’s tax problems. If one spouse has liability issues, it may be best to file separately. By filing jointly, you could be creating one big tax mess. This is also true if one spouse refuses to file for one reason or another or if they are involved in a dispute with the IRS. It’s best to get these issues resolved before filing jointly.
Social Security Benefits
Up to 50% of Social Security benefits may be taxed, depending on AGI. This amount could reach up to 85% if joint income from other sources hits a certain level. You could end up paying more taxes on your Social Security benefits by filing jointly. This could be especially unbalanced if one spouse receives Social Security and the other isn’t old enough or eligible to receive these benefits. When you file jointly, it doesn’t matter if the Social Security income is from just one spouse.
Retroactive Pros and Cons
For tax purposes, it doesn’t matter when you get married in the year. If you file jointly, it’s as if you were married for the entire year. If both spouses have a significant income, this could result in a huge tax bill. The same could be true if one spouse has a significant income and the other doesn’t. In this case, it would make more sense to fill separately. If you file jointly, it doesn’t matter how much income each spouse contributes since all income is considered as belonging to both parties.
Taxes can be complicated. While there are certain benefits to filing jointly, it can also mean paying more taxes than you would otherwise pay if filing separately. Even with the Bush tax cuts, you could still fall into a new tax bracket if your combined income is a significant increase over what you make on your own. Add to this issues with deductions and taxes on Social Security benefits, and it’s easy to make a case for filing separately. While the marriage penalty isn’t as severe as it once was, it can still result in some unexpected surprises when you do your taxes. It’s best to evaluate your situation and weigh the pros and cons of filing jointly before you decide which box to check on your tax form.
Marnie Tory is a full-time freelance writer who specializes in financing topics. She recommends taxfix.co.uk for answers to questions such as: How much tax will I pay?
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