by Julian Block, attorney and former IRS investigator
President Bush’s tax package helps millions of two-income couples. It’ll eventually provide partial relief for those burdened by what has come to be known as the marriage penalty, the long-standing law quirk resulting from the imbalance in the standard deduction amounts (they favor singles over marrieds) and the way the tax brackets are structured. Complete relief never comes for those in above-15 percent brackets.
What enrages many joint filers is the marriage penalty’s compelling them to pay greater taxes on their combined income than they would as two swinging singles who share quarters and report exactly the same income. Some of them have even characterized the penalty as a “sin subsidy” because it confers a financial advantage on couples that forgo holy matrimony or obtain a divorce and thereafter live a more prosperous life in unwedded bliss.
The revamped rules placate joint filers by gradually increasing their standard deduction ($7,600 for 2001) to twice that for single filers ($4,550 for 2001). Also, they’ll have a larger slice of their income taxed at the 15 percent rate bracket (twice as big as for singles), rather than the next bracket of 25 percent.
Like lots of other important alterations, the deduction boost and the bracket adjustment are phased in – IRS lingo for law changes that become effective gradually or only after several years elapse. Not until 2005 do they begin to kick in and not until 2009 do they take full effect.
Critics charge that this kind of overhaul trims taxes for marrieds who already benefit from a “tax bonus” since one mate earns most of the income or considerably more than the other. Moreover, increasing the standard deduction does zip for couples that itemize their payments for things like charitable contributions and real estate taxes, as do higher-income households.
Looking ahead, do you plan to wed or split around year-end? Whether your hitching or unhitching takes place before or after the stroke of midnight on New Year’s Eve can make a big difference in your tax bill’s size for two years.
How come? Because marital status as of December 31 usually determines filing status for the entire year. Consequently, the IRS considers you a married (or single) person for all of 2001 if you should go down the aisle (or shed a spouse) as late as December 31.
Also, assuming you’re reasonably certain about marrying or divorcing later this year, review your withholding. Perhaps now’s the time to file a revised Form W-4 (Employee’s Withholding Allowance Certificate) with your employer or revise payments of quarterly estimated taxes. You might immediately increase your take-home pay or avoid a last-minute payment of a substantial sum come April 15, as well as costly, nondeductible penalties because too little was taken out or paid as estimates.
In case you failed to notice, Congress quietly deep-sixed Mr. Bush’s proposal to allow working marrieds filing jointly to deduct 10 percent of the first $30,000 in earnings of the lower-paid mate, for a deduction of as much as $3,000. But most two-paycheck couples would’ve been unable to take maximum advantage, as the full deduction would’ve become available only when each spouse earned at least $30,000. And, speaking of “inequities,” say sayonara to any deduction when one spouse was jobless, despite having received substantial investment income from mutual fund shares, individual stocks, rental property and so on.
Actually, this would’ve been a retro fix-up. Remember the 1993 movie “Groundhog Day,” in which Bill Murray plays a reporter who’s forced to relive the same miserable experiences in Punxsutawney, Pa., day after day? Bill’s fans, along with those who are of a certain age, like me, might recall that exactly the same $3,000 deduction was introduced in 1981 by Congress as part of its unending quest for tax fairness and because our lawmakers wanted to muffle complaints that they sided with promiscuity and opposed the sacred institution of marriage. That deduction stayed on the books until its deletion, along with numerous other write-offs, by the Tax Reform Act of 1986.
Julian Block is an attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His "Year-Round Tax Savings" shows how to save truly big money on taxes – legally – and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. To order the publication, send $9.95 for a printed copy or $8.95 for an e-mail version to J. Block, 3 Washington Sq., #1-G, Larchmont, NY 10538.