To paraphrase Mark Twain, the reports of the death of the marriage penalty are greatly exaggerated.
Although the Tax Cuts and Jobs Act (TCJA) does eliminate the marriage penalty for some couples, it’s not a complete repeal.
The marriage penalty isn’t a specific provision in the Tax Code. Instead, it is the combined result of several provisions that effectively causes some joint filers to pay more tax than they would owe if they were filing separately as single taxpayers.
First, here’s some background information. Under the graduated federal tax rate system for individuals, income is taxed at a higher level once you exceed the threshold for the next tax bracket. The top tax rate you must pay is referred to as your marginal tax rate and each additional dollar is taxed at that higher rate until you reach the next threshold or you top out at the 37% rate.
In the past, the marriage penalty often affected couples that earned roughly the same amount of taxable income as each other during the year. The main reason was that the dollar brackets for joint filers weren’t exactly double the brackets for single filers, except at the lowest income levels. Thus, when the taxable income of a couple was combined, they may have been pushed into an even higher tax bracket than they would have been in separately.
Of course, other factors come into play. For example if the couple itemized deductions instead of claiming the standard deduction, limits on certain deductions like the medical and miscellaneous expense deductions may have resulted in a smaller combined deduction than the couple would have claimed by filing separately—or no deduction at all for some joint filers.
But the TCJA changes the lay of the land for 2018 through 2025. Among other provisions, including modifications to itemized deductions and the elimination of personal exemptions, the TCJA widens tax brackets and increases the standard deduction for both single and joint filers.
Significantly, the dollar range for the almost all of the brackets for joint filers are now exactly double the dollar ranges for single filers. Voila! No marriage penalty for many couples.
The catch is that there’s still an anomaly for the two highest tax brackets. In other words, some high earners may still be affected by the marriage penalty, despite the common public perception.
What’s more, other provisions in the TCJA—for example, the $10,000 annual limit on state and local tax (SALT) deductions—may be contributing factors. So your high-income clients should not think they are getting off scot-free. In fact, some may have blindsided when they filed their 2018 returns.
On the plus side, the “marriage bonus” that rewards couples with disproportionate incomes remains in effect for some high-income earners. Discuss all the implications with your clients and devise strategies to maximize the tax benefits for their particular situation.
Next up in this series, Depreciation and Section 179
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...