For example, let’s consider the two highest tax brackets. The tax code does not exactly double the single tax brackets to derive the brackets for married couples filing jointly. This is why the marriage penalty, at least with respect to tax rates, generally affects high-earning couples where each spouse makes a similar income to the other. In other instances, the marriage penalty does not have to do with tax rates but with limitations on certain deductions or credits not being doubled for married taxpayers filing jointly. In these cases, taxpayers with lower incomes could experience a marriage penalty, as well.
Example of the Marriage Penalty
The marriage penalty can be the result of disparate tax rates between individual and married taxpayers at certain income levels. It also results from the tax code implementing the same limitation on certain tax benefits for both individual and married taxpayers, or both those situations. High-income couples in which each spouse makes a similar amount of money often face a marriage penalty. To figure out the penalty, first determine the taxes owed by each taxpayer individually based on the IRS tax brackets, then calculate how much is owed when they file jointly. For instance, let’s say one spouse earns $375,000 a year, the other spouse earns $425,000 a year, and they file their taxes jointly. If they take the standard deduction (and no other deductions or credits), they would be subject to a marriage penalty. See how this example is calculated in the tables below for tax year 2023.
Tax-Rate Marriage Penalty
Up to a certain income level, the income tax brackets for married couples filing jointly are exactly double that of single taxpayers. However, in the 35% and 37% brackets, this is not the case, as the table below shows. This means that each spouse, if unmarried, would individually be able to deduct up to $3,000 in excess capital losses per year, for a total of $6,000 between them. However, they would be limited to a $3,000 capital loss on their joint tax return. Additionally, for both single taxpayers and married taxpayers filing jointly, this $25,000 allowance phases out by 50 cents on the dollar for each dollar of their modified adjusted gross income in excess of $100,000. So, when their modified adjusted gross income exceeds $150,000, they are no longer eligible to deduct any rental losses against their nonpassive income. As a result, two spouses each earning $100,000 a year each could, if they were unmarried, each deduct up to $25,000 in rental losses against their nonpassive income. However, they could not deduct any rental losses against their nonpassive income on their joint tax return because their joint income would exceed $150,000. This means that each spouse, if unmarried, would individually be able to take up to a $10,000 SALT deduction provided that each person itemized their deductions, for a total of $20,000 between them. However, they are limited to a $10,000 SALT deduction on their joint tax return, or $5,000 per person if married filing separately. Two spouses each earning $15,000 a year with no dependents could, if unmarried, each be eligible for the earned income tax credit. But as a married couple filing jointly, they would not be eligible for the credit because their joint income would exceed $22,610. Filing separately would not help them, either, because the earned income tax credit cannot be claimed by taxpayers using the married filing separately tax status.
State Tax Marriage Penalty
State income tax rates and laws often differ from the federal income tax rates and laws. Therefore, it is possible for a couple to experience a marriage penalty for state tax purposes but not for federal tax purposes, and vice versa. For example, none of Minnesota’s income tax brackets for single taxpayers are doubled for married taxpayers filing jointly. This means that married Minnesota couples where each spouse makes more than $20,525, and they each make a similar amount of money, will experience a marriage penalty for state income tax purposes.
Marriage Penalty vs. Marriage Bonus
Sometimes, however, married couples pay less in taxes than they would have paid if they had remained unmarried. Instead of experiencing a marriage penalty, then, these couples experience a marriage bonus. This is because often in this situation, the taxpayers’ marginal tax rate as a married couple filing jointly is lower than the higher-income spouse’s tax bracket as an individual. Their joint marginal tax rate may, of course, be higher than the lower-income spouse’s tax bracket as an individual. However, the effect of a lower rate on the higher-earning spouse’s income is greater than the effect of a higher rate on the lower-earning spouse’s income, simply because the higher-earning spouse makes more money. For example, let’s say one spouse in a marriage earns $300,000 a year, the other spouse earns $30,000 a year, and they file their taxes jointly. If they take the standard deduction (and no other deductions or credits), their marginal tax rate would be 24% and their joint tax liability for tax year 2023 would be $59,352. However, if these taxpayers had not been married and had each filed as single individuals, the higher-earning spouse’s marginal tax rate would be 35% and the lower-earning spouse’s marginal tax rate would be 12%. Their combined tax liability for tax year 2023 would be $73,765. This couple’s marriage bonus is the $14,413 decrease in their joint tax liability. While a marriage penalty of a few thousand dollars for high-income couples may not be material to their financial situation, the effect may be felt more strongly by lower-income couples who miss out on the Earned Income Tax Credit as a result of getting married.
