What Is The Marriage Tax Penalty? Here's What To Know While Filing Your Taxes
If people sometimes hurry up and get married allegedly for tax reasons, then what is the marriage tax penalty you also hear about? Like the marriage tax break, the marriage tax penalty isn't one specific part of the tax code aimed at married couples for the purpose of altering their behavior. It is a way of speaking about a set of unfavorable tax implications for married couples, as compared to the taxes they would pay separately if they remained (or became) unmarried.
According to the most recent data available through the Congressional Budget Office, 42 percent of married Americans did, effectively, incur a tax penalty for being married in 1997. Social trends since then (in particular, more two-income households) may mean that now more married Americans are hit with the tax penalty than receive the alleged marriage tax break. Unfortunately, the tax penalty also falls heavily on married couples with more children — exactly one of the groups you would expect a just tax code to protect.
One primary mechanism resulting in a marriage tax penalty is the Earned Income Tax Credit (EITC). It was designed as a way to provide benefits to low and middle income earners, primarily those with children, without disincentivizing work in the process (without the EITC, some Americans were dismayed to find that working more made them worse off, sometimes causing them to lose eligibility for other benefits). The credit is refundable, meaning that if you receive more of an EITC than you owe in taxes, you'll receive the difference in the form of a cash refund payment. The 2015 EITC amount falls between $2 and $6,143, available to those earning below certain maximums.
The problem is that EITC doesn't double the income maximums for married couples as opposed to single people. This means that, when two lower-income people marry, they are pushed towards the top of the income range allowed for EITC, reducing their payment significantly or even making them ineligible to receive any EITC at all. Additionally, EITC offers less of a credit for each additional child, up to three. This means that two individuals with several children between them can benefit by remaining unmarried and each claiming some of the children, rather than combining as one household for tax purposes.
When two similarly-earning people marry, they are also often penalized by the tax implications. Remember, the percent of tax that you pay on your income goes up in chunks according to specified "brackets." You pay a lower percent of income tax on the first dollars you make than on the last dollars (this is a marginal, progressive income tax). The brackets for tax rates for married couples are not simply double the ranges specified for single filers. This means that one spouse's moderate income, when stacked on top of the other, can reach a new, higher marginal tax rate than it would have fallen into for a single person.
Finally, couples can effectively be penalized for marriage by the Child Tax Credit (CTC). The CTC is only available to filers below a certain income and, like the EITC, the amount gradually decreases as incomes approach that threshold. However, the cutoff income for married filers (households) is less than double that of individuals. This means that some married filers would come out ahead by divorcing and filing separately, making them more eligible for the CTC.
Though of course marriage can provide benefits other than financial ones, the impact of these features of the tax code on Americans is real. Though marriage tax bonuses are more common to receive than penalties, their distribution is uneven and the EITC penalty in particular tends to fall on less privileged members of society. To find out more about your specific tax situation, try a marriage tax calculator, and try to keep your chin up.