Marriage Pros and Cons Under the New Tax Law
How your taxes can be affected when you say "I do"
Would you allow tax law to sway your decision about tying the knot with your most significant other? Research has said that the vast majority of us don’t, but some spouses work—or don’t work as much—with tax implications in mind.
Much has been said and written about the marriage penalty over the years. It doesn’t happen to everyone, but two individuals earning roughly the same incomes could historically be expected to pay more in tax dollars if they married rather than remained single.
The Tax Cuts and Jobs Act changes 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 married taxpayers.
The Marriage Penalty
The marriage penalty is the result of federal tax brackets. Couples who are married and who 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. But here’s the problem. Those tax brackets haven’t always exactly doubled to accommodate two earners.
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—$28,900 more than the max for the married filing jointly tax bracket. They would move into the 28% tax bracket simply by virtue of filing a joint married return.
What if they 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 were 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 here. And filing separate married returns disqualifies taxpayers from many tax breaks and credits as well.
And a Marriage Bonus…
This wasn't as much of an issue for spouses who weren’t doubling their incomes by marrying because they both earned roughly the same. In fact, 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 how much less income the under-earning spouse brought in, the higher-earning spouse could earn more and pay less of a percentage than they would by filing a single return.
And what of lower-income spouses? The married filing jointly 10 and 15% tax brackets for joint married filers are exactly double those for single filers. The marriage penalty only really kicked in for middle-and upper-income filers.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act balances things out for most taxpayers by restructuring the tax brackets. Currently and through 2025 when the TCJA expires unless Congress renews it, the income perimeters for all tax brackets except one are double those for single filers.
Remember that couple who were each earning $91,000 annually in 2017? We’ll assume that neither of them have received a raise. They’re still earning the same. Under the TCJA’s brackets, they’d each fall into the new 24% range if they didn’t marry and they filed single returns.
And if they married? They’d fall into the new 24% range for married taxpayers who file jointly as well. And yes, that’s 1% less than they would have paid before the TCJA went into effect. There’s no more 25% bracket. The 24% bracket jumps to 32% at individual incomes of $157,500 and joint married incomes of $315,000—exactly double.
The highest tax bracket is down to 37% from 39.6% in 2017. This is still subject to the marriage penalty but you won’t hit it until you earn more than $500,000 as a single individual or $600,000 if you’re married and file jointly—not even close to double.
Congress has indicated that preserving the marriage penalty at the highest tax rate will help fund other taxpayer-friendly provisions of the TCJA so the adjustment wasn’t quite made across the board.
Tax Credits and Other Issues
The marriage penalty isn’t just about tax brackets. It rears its ugly head in 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’re different depending on whether you’re married or single. Marrying and combining incomes will still disqualify some lower-income couples from claiming this tax credit.
As for that itemized tax deduction for property, state, and local taxes, the TCJA caps this at $10,000 for every taxpayer whether he's single or married and 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.
Congress argues that 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. This one might not be as glaring as it appears on the surface.
The TJCA hasn’t altered the 3.8% tax on net investment income, either. 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 or $200,000 each so that marriage license leaves $150,000 on the table.