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Will Year-End Newlyweds Owe the Marriage Penalty?

Dec 9th 2016
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Are you getting married around the end of the year? Usually, it doesn’t make sense to change your wedding date at the last minute. But be aware that you could be hit by the “marriage penalty” for a wedding in 2016 if you and your spouse have roughly the same amount of annual earnings.

Conversely, if one “significant other” has significantly more income than the other, you might cut your overall tax bill by getting married in 2016.

However, in yet another twist, if tax rates are lowered next year – as promised by President-elect Donald Trump – waiting until 2017 could reap tax rewards.

To understand how the marriage penalty works, you must look at the current tax rate structure. For starters, the income taxable to joint filers in the two lowest tax brackets of 10 percent and 15 percent is double the income for single taxpayers. For 2016, the upper threshold of taxable income is $37,650 for single filers and $75,300 for joint filers.

However, things begin to diverge for the tax brackets of 25 percent and above. In this case, the tax bracket covers more income for two single filers than it does for joint filers. For example, single filers in the 25 percent bracket can show a maximum total of $183,000 in 2016 (up to $91,500 each) before reaching the 28 percent bracket, while the upper limit for joint filers is only $151,900. And it goes on from there.

Absent circumstances that may affect their tax picture, some couples are typically hurt by filing jointly instead of as single filers, while others benefit.

Example 1: Ricky has a taxable income of $300,000 a year, and Lucy has $275,000. If they remain single, both Ricky and Lucy are in the 33 percent tax bracket in 2016. As a single filer in 2016, Ricky owes tax of $82,529.25. As a single filer in 2016, Lucy owes tax of $74,279.25. Their combined tax liability: $156,808.50.

Now let’s see what happens if Ricky and Lucy marry in 2016 and file jointly. They will have a combined taxable income of $575,000, putting them in the top 39.6 percent bracket. They would have to pay tax of $177,366.30 – or $16,557.80 more.

Example 2: Fred has a taxable income of $120,000 a year, and Ethel has $25,000. If they remain single, Fred is in the 28 percent tax bracket, and Ethel is in the 15 percent bracket in 2016. As a single filer in 2016, Fred owes tax of $26,636.75. As a single filer in 2016, Ethel owes tax of $3,286.25. Their combined tax liability: $29,923.

Now let’s see what happens if Fred and Ethel marry in 2016 and file jointly. They will have a combined taxable income of $145,000, putting them in the 25 percent bracket. They would have to pay tax of $27,792.60 – or $2,130.40 less.

What will happen in 2017? Although there are no guarantees, President-elect Trump has proposed streamlining the tax rate structure to just three brackets, with rates of 12 percent, 25 percent, and 33 percent. He would also impose a curb on itemized deductions for high-income taxpayers, among other sweeping changes.

It’s still too early to tell, but it’s likely that the tax liability for both couples in the scenarios above would be reduced if tax reforms are enacted, but the potential for the marriage penalty would remain.

Best advice: In the unlikely event your wedding date is still up in the air, 2017 seems to be a preferable calculated risk. Otherwise, get married when you want to and let the taxes fall where they may.

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Brett Layton, CPA
By bltaxes
Dec 12th 2016 18:28

Two can live as cheaply as one... The government is fully aware of what is happening. Just another way to squeeze more money out of people who can "afford" it.

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By skinnyvinny
Dec 12th 2016 20:25

Exactly. In the eyes of Uncle Sam, married couples with two incomes and one household have "lots" (supposedly) of disposable income.

The solution, it would seem, would be to live together, but don't get married. At least from a tax standpoint...

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