Should Tax Rates Penalize Marriage?

04.14.2013, 8:55 PM

Interesting discussion at today’s “Room for Debate” concerning marriage and the tax code:

“Even with marriage in the news this spring, it’s easy to forget that it comes at a price: the “marriage penalty” hits many couples on tax day. Federal tax rates generally discourage dual-income couples from getting married, and encourage single-earner couples to marry.

Does this mixed message make sense? Is there a better approach?” Read More…


24 Responses to “Should Tax Rates Penalize Marriage?”

  1. Diane M says:

    I have the unusual opinion that it is actually fair to have your income taxed at a higher rate if you are married to someone who is earning money. You have more money than a single person earning the same amount as you do.

    Take two guys with the same job, earning $50,000/year.

    The first is single and has two kids. His $50,000 has to support all three of them.

    The second is married to a wife who earns $40,000/year. They have a kid. They have $90,000 for the three of them to live on.

    The only reason anyone thinks of this as a marriage penalty is that we live with people before we marry now.

    I don’t think we should tax cohabiting couples at the same rate as married couples, though. Cohabiting couples are generally not pooling their incomes. They are waiting to see if they want to stay together and making sure they can get out financially if they have to.

    So maybe we need a new category – married for tax purposes. If you live together for five years, you have to file as married for tax purposes.

  2. Diane M says:

    Of course, for low-income families, you need to change the tax code. They don’t have enough to live on as it is.

    A tax break to make it easier to marry would be good for lower income families.

  3. mythago says:

    The “marriage penalty” tends to apply to higher-earning couples and to dual-income couples:

    http://www.dailyfinance.com/2013/02/14/marriage-penalty-tax-bill-valentine/

    I don’t understand “married for tax purposes”.

  4. Diane M says:

    @Mythago – “The “marriage penalty” tends to apply to higher-earning couples and to dual-income couples:”

    I’m not sure what you mean about higher-earning couples. I would think that it applies to any couple with two earned incomes. Are you saying it makes more of a difference for for a couple with two high incomes?

    “I don’t understand “married for tax purposes”.”

    It’s just a way of saying that if you live together as a couple, at a certain point you should pay taxes at the same rate as a married couple, whether or not you choose to get married. The idea is that you actually have an income that is much larger than other people’s and should be paying as a family, not trying to pay less.

  5. La Lubu says:

    You have more money than a single person earning the same amount as you do.

    But that isn’t true. A single-income household only needs one car (one car, one gas tank, one auto insurance policy, one set of maintenance bills). If it’s a two-adult, single-income household with children, paid childcare isn’t needed (the other adult does unpaid childcare at home). “Work clothes” and/or dry cleaning are only needed for one person. So, depending on the individual income breakdown, a dual-income household doesn’t necessarily have more disposable income than a single-income household, especially among young people just starting their careers and households (thus, lots of “start-up” expenses).

    I don’t know exactly how and under what circumstances the ‘marriage penalty’ falls on couples—what combination of income, savings, and deductions either kicks in the marriage penalty or erases it. I do think that there shouldn’t be one (or, that married couples ought to be able to choose to file at the lesser, single rate if the married rate is higher). Our tax code should not penalize people for working, even if certain people think a second person’s income is not “necessary” (necessary for whom?). A person—married or single—should not be penalized for working. Period.

    Our real problem is that earned income is taxed at a higher rate than unearned income. We privilege large investors more than the average wage earner. Speaking of the average wage earner, dual-income households with children significantly outnumber single-income households with children.

    Question: frequent-flyer in these parts, Barry Deutsch, lives in a multiple person household and has for years. With whom would he file as “married for tax purposes”, and why? An older, retired friend of mine is moving back to Chicago to live with her daughter, in order to assist her daughter with transportation for her son’s admission to some competitive school (they don’t know which one yet—they get the letter in May). Her daughter wouldn’t be able to get him back-and-forth with her work schedule. So….she would have to file as being “married” to her daughter “for tax purposes” (since she will be living with them for over five years)? What happens if her daughter gets remarried during that time (which would invariably be to a man who also works full-time, as she does?). Do roommates in big cities have to scramble for new roommates every five years in order to avoid the “married for tax purposes” penalty?

    In other words, why is it important to retain the tax penalty for married couples, rather than give them the option to file at the lower, single rate?

  6. Rhonda says:

    The “marriage penalty” hits when it pushes the household income over into the next tax bracket. For example, 20k-99999.99, the tax bracket is 10%, from 100k to 199999.99 the tax is 15%. I make Let’s say I earn 15K/yr, and my wife earns 90k/yr. Individually, I would pay no tax, she would pay 10%, but jointly we pay 15%.

  7. annajcook says:

    It is my understanding that the differential tax rates for married and unmarried people are a legacy from the period when a married woman’s income was generally substantially less than her husband’s over their married lives. This, the “married” tax rates are actually beneficial for couples where one partner is unable to work full time or makes significantly less than the other.

    For example, my income as a single person in 2012 fell into the 15% marginal tax rate bracket; for 2013, thanks to a promotion and raise, I will be making enough as a single person to fall into the 25% tax rate bracket. However, because my wife is working part time, our combined tax rate (if we were allowed to file as married under federal law) would actually remain at 15%. The differential tax rate is designed to recognize that a married couple is pooling their economic resources and generally has MORE expenses on LESS income than a single person making the same salary.

    My wife and I, rather than paying some sort of marriage penalty (assuming DOMA falls, *knock on wood*) would actually stand to benefit from the government recognizing that our resources are stretching to support a household rather than two single people.

    People who make equal salaries always have the option of filing separately instead of jointly and paying the same rates as single people — at least in the income range my wife and I will likely remain in our entire working lives! Even if they aren’t paying the same rates, they’re paying somewhere closer to “single” rates. So I think the “marriage penalty” question is one that only becomes a concern for upper-middle class earners, people who folks at this blog point out are still marrying quite steadily in the U.S.

  8. Teresa says:

    In other words, why is it important to retain the tax penalty for married couples, rather than give them the option to file at the lower, single rate?

    I would argue that the single rate is not lower. At least, it never was when I was working fairly full-time.

    I would also argue most people have no idea what arrangement is going on in what is termed a single household. I lived for 23+ years with my elderly Aunt, and not until the last couple of years could I file as Head-of-Household. Her savings were spitting negligible, but sufficient to keep our little household filing as Single.

  9. annajcook says:

    Another way of phrasing this question would be, “Should tax rates penalize unmarried cohabitation?”

  10. Teresa says:

    Nice suggestion, Anna J.

    I do recognize that marriage is a society’s greatest asset, and that I should help support that common good. However, tax filing time was always a sore point for me. I can attempt to be fairly gracious on inequity, but when money is at a premium, when every dollar counts … then, not so much.

    Perhaps, this is part of married persons are happier, healthier and live longer.

  11. Diane M says:

    Thanks, Anna Cook, for pointing out how the current system helps couples where one person earns more than the other.

    The majority of wives earn less than their husbands, so the current system must benefit many couples.

    The problem is, it’s impossible to avoid penalizing someone. If you change the system, then couples with two equal earners will pay lower taxes than couples where one person earns less than the other and couples where one parent stays home with the children.

    Why in the world should people have to pay higher taxes because they are either:

    a) putting time into providing high quality child care in the early years to the next generation, aka everyone’s future; or

    b) working at jobs that don’t pay well.

    We would be trading the so-called “marriage penalty” for a “parenting penalty” and a “you-don’t-earn-as-much-as-your-husband penalty.”

    @LaLubu – “So, depending on the individual income breakdown, a dual-income household doesn’t necessarily have more disposable income than a single-income household, especially among young people just starting their careers and households (thus, lots of “start-up” expenses).”

    The start-up expenses would be the same for two young couples with kids. More importantly, there are savings that come with not paying for child care and nice clothes for yourself, but not enough to help you pay more taxes than couples where both parents work outside the home. Meanwhile, you are also not earning Social Security credits.

    And that doesn’t get to the issue Anna Cook raises – what if you want to go back to paid work and are paying for nice clothes, but not earning that much. Why should you pay more taxes than another family where the wife earns the same amount as her husband?

  12. Diane M says:

    @Anna Cook – “People who make equal salaries always have the option of filing separately instead of jointly and paying the same rates as single people — at least in the income range my wife and I will likely remain in our entire working lives!”

    As much as I dislike the idea of making couples with unequal wages pay higher taxes than couples with equal wages, I don’t think this is true. Filing separately usually makes you pay more taxes because you can’t take as many deductions. You also have to coordinate whether you will itemize or take a standard deduction. Apparently it is most beneficial financially if one of you has large deductions that can go against your income, but if you put both incomes together you would have an above average income. That would be upper-middle class or rich people, I think.

    http://www.smartmoney.com/taxes/income/married-but-filing-separately-15597/

  13. Diane M says:

    @Rhonda –

    It’s looking to me like getting married doesn’t make a difference to your taxes if you’re poor, although you don’t have to be rich for it to kick in.

    “The “marriage penalty” hits when it pushes the household income over into the next tax bracket. For example, 20k-99999.99, the tax bracket is 10%, from 100k to 199999.99 the tax is 15%.”

    I don’t think those are the actual tax brackets, though. This is what I get from About.com for next year:

    10% on taxable income from $0 to $17,850, plus
    15% on taxable income over $17,850 to $72,500, plus
    25% on taxable income over $72,500 to $146,400, plus
    28% on taxable income over $146,400 to $223,050, plus
    33% on taxable income over $223,050 to $398,350, plus
    35% on taxable income over $398,350 to $450,000, plus
    39.6% on taxable income over $450,000.

    That’s on taxable income, though. A childless married couple who takes the minimal deductions would pay no taxes on the first $22,500 of their income.*

    So, if the household income is less than $40,350, I don’t think it makes a difference if the couple is married or not. They will pay nothing for the first $22,500 and 10% for the rest.

    For a couple with one child, being married won’t affect their taxes unless they earn more than $44,150 and for a couple with two children, it won’t affect their taxes unless they earn more than $47,950 (twice the poverty level).**

    Similarly, the couple with a joint taxable income of $72,500 has a total household income of at least $95,000.*** In that case, I think they should suck it up and pay their share of taxes.

    So the difficult point is when taxes go from 10% to 15%. The couple has an income of somewhere between $40,350 and $95,000. $40,000 is below the median, but $95,000 puts you near the top 20%.

    It’s worth noting that when you go into a higher tax bracket, you don’t suddenly pay a higher percentage on all of your income. So if a couple earned $50,350 together, they would pay nothing on $22,500 and 10% on $17,850 and 15% on the last $10,000.

    The bottom of that range is where it makes sense to talk about whether or not someone might be afraid to marry and have their taxes go up.

    But I’m not a tax expert, just a person who does the family taxes.

    Am I missing something?

    *A married couple gets a standard deduction of $11,900 and then exempts $3800/person before you figure your taxes.

    **You can add a $3800/exemption for each child before you look at taxable income. In addition, you can subtract $1,000/child from your actual taxes, so although the tax rate may be higher on your income over $44,000 or $48,000, it may not make much of a difference to your tax bill.

    ***At that level of income, they may very well have itemized deductions so their household income could be more than $95,000.

    http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2013-Tax-Year.htm

  14. Diane M says:

    Ack, no, I’m wrong. “So, if the household income is less than $40,350, I don’t think it makes a difference if the couple is married or not. They will pay nothing for the first $22,500 and 10% for the rest.”

    If each person in the couple earns $17,850, it makes a difference. Separately, they would pay no taxes at all. Together they would have $35,700 in income; with deductions it would go down to $13,200 and they would pay 10% on that.

    If their joint income is below $22,500 it would make no difference if they were married or not.

    However, if one of them earns $10,000 and one of them earns $25,700, the first one would pay no taxes while the second one would pay 10% on $15,950. So for them, being married would bring down their tax bill to 10% of $13,200.

    The question is – in households where people are living together, which situation are they in?

  15. Rhonda says:

    Diane M,
    I tip my hat to you. I was just trying to give a rough example, not to be exact. ;) But that is true. The tax hurts the lower-income married couples more than the higher-income couples. Color me surprised.

    I think that if you are watching every penny, simply cohabitating is more reasonable than getting married. If you have a bit of disposable income, then marriage is a good option.

  16. La Lubu says:

    Well, I realize that I’m criticizing from the cheap seats as someone who files head-of-household with the 1040A, but…..can anyone offer a reason why a married couple should have to pay more taxes as a married couple than the both of them would pay filing as single taxpayers? What about marriage is so detrimental that married couples should be taxed extra for it? Or is it not that they’re being taxed extra for being married per se, but for being married and continuing to hold full-time employment?

  17. Diane M says:

    ugh – I’m wrong again and I was right the first time.

    “If each person in the couple earns $17,850, it makes a difference. Separately, they would pay no taxes at all. Together they would have $35,700 in income; with deductions it would go down to $13,200 and they would pay 10% on that.”

    But since you don’t pay taxes on the first $17,850, they would still pay no taxes.

    They wouldn’t pay taxes until they earned $4,650 more or $40,350 in income.

    @Rhonda – “The tax hurts the lower-income married couples more than the higher-income couples.”

    It depends how you look at it. The higher income couple stands to lose a more money if they earn the same amount and are married. The difference is that they can afford it.

    And the lower-income couple won’t see an increase in their taxes if they marry unless their joint household income is over $40,350.

    The confusing thing is that for any couple with a joint income over $40,350, it might actually save them money to marry. It all depends on the math in their particular case.

    I’m inclined to think that many couples would save money because it is so common for one person to earn more than the other.

    I’m really wondering about the whole idea of eliminating the “marriage penalty.” Does it make the math better or worse for most lower income couples who live together?

    If the math does make it better to be married (because you can use deductions together), I think that would be worth advertising to people.

  18. Diane M says:

    “can anyone offer a reason why a married couple should have to pay more taxes as a married couple than the both of them would pay filing as single taxpayers?”

    Yup. Single people live on their own income. Married people have more money.

    Why should a single mother earning $50,000/year pay taxes at the same tax rate as a married mother earning $50,000/year who is married to a man who earns $100,000?

    The second family has $150,000 to live on, the first one has only $50,000.

    Why shouldn’t the family with $150,000 in income pay at the higher rate for $50,000 of their income?

    Doesn’t this increase income inequality rather than decrease it?

  19. Diane M says:

    So it turns out marriage bonuses are more common than marriage penalties. Guess I should have clicked on the link:

    “A “marriage penalty” occurs in the tax system when a wife and husband pay more income tax filing jointly as a couple than they would if they had remained single and filed as individuals. Conversely, a “marriage bonus” occurs if a couple pays less tax filing jointly than they would if they were not married and filed singly. Couples with marriage bonuses far outnumber those incurring marriage penalties but precise estimates are not available.”

    Now I think this could have changed if “marriage penalty relief” had not been extended recently.

    However, it is interesting that most people get a marriage bonus. Something worth advertising.

    On the other hand, here is another angle of it all that makes things worse for low-income workers:

    “Taxpayers who might qualify for the earned income tax credit (EITC) can suffer particularly large marriage penalties if the income of one spouse disqualifies the other from getting the credit. At the same time, marriage can increase the EITC if a nonworking parent marries a low-earning worker.”

    I’m going to assume that low-earning workers don’t usually marry nonworking parents.

    http://www.taxpolicycenter.org/taxtopics/Marriage-Penalties.cfm

  20. Diane M says:

    More interesting info:

    My summary:

    Most low-income cohabiting couples with children would pay lower taxes if they got married.

    However, some couples would lose their earned income tax credit.

    “Among cohabiting couples with children, slightly more than half (50.7 percent) would pay more in tax as a married couple than they pay as cohabiting individuals under 2003 law, 42 percent would pay less on marriage, and 7.3 percent would experience no change (annual change of less than $50) in their tax liability. Under 2008 law, 44.1 percent of cohabiting individuals with children would pay more in tax if they were married, and 48.5 percent would pay less in tax if they were married. For low-income cohabiting couples with children (income less than twice poverty), the odds that a couple will receive a bonus on marriage are higher. Under 2003 income tax law, 63.3 percent of those families would pay less in tax as a married couple — a number that jumps to 74.7 percent under 2008 law. Generally, partners with unequal incomes receive a marriage bonus, and that is more typically the case among low-income households. As seen in table 1, those penalties and bonuses can be substantial.

    By far, the earned income tax credit (EITC) serves as the largest source of both penalties and bonuses for low-income families. Couples composed of one person with children and low or no earnings typically receive a higher EITC on marriage (because their combined earnings are typically below the EITC thresholds) while couples in which both partners have modest earnings are likely to lose their EITC on marriage because their combined income exceeds that which is eligible for the EITC. EGTRRA provided marriage penalty relief relating to the EITC for some couples by increasing the amount of income a couple could have relative to that of a single parent before the EITC began phasing out. ”

    http://taxpolicycenter.org/publications/url.cfm?ID=1000788

  21. La Lubu says:

    Yup. Single people live on their own income. Married people have more money.

    Why should a single mother earning $50,000/year pay taxes at the same tax rate as a married mother earning $50,000/year who is married to a man who earns $100,000?

    But that isn’t what we’re talking about. The argument isn’t that higher income households shouldn’t pay more taxes than lower income households—they should! The argument is that two-income married households should not have to pay more in taxes than either single-income married households with the same income OR more than the sum of what they would pay as single taxpayers, again, with the same income as a single-income married household.

    That’s what the “marriage penalty” is—that a married couple has to pay more in taxes than what they would have to pay as “singles”—more than the sum of the taxes for the both of them if they were single, and more than they would have to pay if, instead of having a combined income, one of the pair was bringing home that same income while the other had no income.

  22. annajcook says:

    What I’m seeing across all these pieces of information and advice is two themes:

    1) That the American income tax system is designed with a particular social agenda in mind — apart from simply generating revenue — and that is not only pushing Americans toward marriage, but toward a particular type of marriage. This is, I suspect, a legacy of the New Deal-era expansion of state regulation of familial relationships. Although I’d have to do more digging in the historical scholarship. In general, 1930s-era welfare supports were designed with the heteronormative family in mind (male breadwinner, female home-maker, children). Women were forced out of wage-earning jobs and single women and men were held in suspicious regard by society and the state. I am guessing that the income tax system was constructed around these assumptions made by the “Straight State” (as historian Margo Canaday terms it).

    2) The problem (well, one of them) with this system is that it doesn’t adequately reflect family diversity (it never did), nor the cost of living and caring for dependents in the 21st century. This is why we have a regressive income tax that, sometimes, ends up punishing lower-income earners for earning and/or dual-income households for making enough to pay rent.

  23. Diane M says:

    @LaLubu – I think the argument is about tax rates. If you earn more, you pay at a higher rate. That’s progressive and a good thing.

    If you earn $50,000 a year, you’ll pay income tax at a lower tax rate than if you earn $100,000.

    So the question is, why should a family with $150,000 in income, not pay a higher tax rate than a family with only $50,000 in income?

    “The argument isn’t that higher income households shouldn’t pay more taxes than lower income households—they should! The argument is that two-income married households should not have to pay more in taxes than either single-income married households with the same income OR more than the sum of what they would pay as single taxpayers, again, with the same income as a single-income married household.”

    Two-income married households never have to pay more in taxes than a single-income married households with the same income. They pay the same amount.

    If you make two-income married household pay the same in taxes as they would as two single individuals, they will either:

    pay more in taxes than they would as a married couple because one of them has a bigger income than the other, or

    if the couple has nearly equal income, they will pay less in taxes than a single earner couple with the same income.

  24. Diane M says:

    @Anna J Cook – I think the income tax system was not designed to push married families on anyone. I think it was designed that way because everyone was married. That was the norm and it was what people wanted.

    It’s not that they wanted to promote a particular social agenda. They were making assumptions, but the assumptions were based on the reality of their time.

    Overall, it was a good, progressive thing. It allowed families to pay lower taxes if they were supporting more people. People with more income paid taxes at a higher rate. The system worked against income inequality.

    Almost everybody got a marriage bonus and paid lower taxes if they got married.

    People didn’t live together without getting married, so nobody thought they were getting a marriage penalty.

    Anyhow, at this point, I don’t see how you could change it without making it so that married couples where one person earns more than the other pay more in taxes than married couples where both people earn the same amount or close.