Would you allow tax law to sway your decision about tying the knot with your significant other? Many of us may not consider it, but some spouses do keep tax implications in mind.
Much has been said and written about the marriage penalty over the years. It doesn’t happen to everyone, but historically, two individuals earning roughly the same incomes could have been expected to pay more in tax if they were married rather than single.
The Tax Cuts and Jobs Act (TCJA) changed that to some extent in 2018. Although the new tax bill doesn’t eliminate the marriage penalty entirely, it modifies some tax laws to spare many married taxpayers.
The Marriage Penalty
The marriage penalty is the result of federal tax brackets. Couples who are married and file joint tax returns have historically been able to enjoy more income before moving into a higher tax bracket, and that makes sense, because there are two of them. However, those tax brackets haven’t always exactly doubled to accommodate two earners.
The marriage penalty mostly hit spouses who doubled their incomes because both spouses earned roughly the same income.
The 25% tax bracket topped out at $91,900 for single filers in 2017 and at $153,100 for married taxpayers who filed jointly. If two spouses each earned $91,000, their combined income would be $182,000, landing them in the 28% bracket.
What if they had filed separate married returns instead? The cap on the 25% tax bracket for married individuals filing separately dropped to $15,350 less than it would have been if they had been single—$76,550.
The brackets for separate married returns have been set at half those for joint married returns, so there was no relief to be found there. Filing separate married returns also disqualifies taxpayers from many tax breaks and credits.
The Marriage Bonus
When one spouse earned significantly less than the other, they would actually catch a break with how the tax brackets were set up. Depending on exactly how much more one spouse earned than the other, the higher-earning spouse could ultimately face less of a tax burden than they would have if they had been filing a single return.
Lower-income families didn't necessarily get a marriage bonus, but they were largely spared the marriage penalty. The married-filing-jointly 10% and 15% tax brackets for joint married filers were exactly double those for single filers.
The marriage penalty mostly affected middle-income and high-income families.
Impact of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act restructured the tax brackets significantly, and it effectively removed the marriage penalty for many taxpayers.
Most aspects of the TCJA that impact families and individual taxpayers are scheduled to sunset after the 2025 tax year. Barring further legislation, many aspects of the TCJA that affect average taxpayers will revert to how they were in 2017.
To explore how the new tax brackets work, let's return to that example of married spouses who each earn $91,000.
In both 2020 and 2021, $91,000 salaries would land them in the 24% tax brackets if they were to file single returns. Under the TCJA, the married-filing-jointly threshold for the 24% tax bracket is exactly double the single-filer threshold.
In other words, whether this couple file as two single filers or as one married couple, their tax bracket stays the same—there isn't a marriage penalty.
While most taxpayers no longer pay a marriage penalty, high-income couples still do. The married-filing-jointly thresholds no longer double the single-filer thresholds at the 35% bracket.
If you and your spouse both earn more than $311,000 in 2020 ($314,000 in 2021), then you may end up paying more taxes as a married couple than you would have as single filers.
However, even though those earning well into six figures can end up in the highest tax bracket by filing jointly, the rate imposed on the highest tax bracket was reduced by the TCJA.
The top earners used to be taxed at a marginal rate of 39.6%. The TCJA dropped that rate to 37%.
Tax Credits and Other Issues
The marriage penalty isn’t just about tax brackets. It rears its ugly head under a few other tax circumstances as well, and the TCJA does not affect all of them.
The Earned Income Tax Credit still has income limits in place, and they vary, depending on whether you’re married or single. Marrying and combining incomes will still disqualify some lower-income couples from claiming this tax credit.
Under the 2021 American Rescue Plan, income thresholds for many tax credits, including the Earned Income Tax Credit, were temporarily increased. More married couples may be eligible for these credits in 2021, even if their joint income was too high in previous years.
As for that itemized tax deduction for state and local taxes (the "SALT deduction"), the TCJA caps this at $10,000 for every taxpayer, whether they're single or married filing a joint return. A couple who didn’t marry could claim $20,000 in deductions on two separate returns, but the married couple is limited to $10,000 on one return.
This deduction limit is reduced to $5,000 for married couples filing separately, so filing separately won't help you avoid this deduction cap.
When it comes to the SALT deduction, it might not be as unfair to married couples as it initially appears. It can be presumed that married couples are sharing payment of these SALT taxes, and two taxpayers can't both claim deductions for the same expenses.
The TJCA hasn’t altered the 3.8% tax on net investment income. This tax kicks in at investment income over $250,000 for married couples filing jointly but $200,000 for individual filers.
Two individuals who didn’t file a joint return would have a threshold of $400,000 ($200,000 each), so that marriage license leaves $150,000 on the table.