The taxing truth about marriage
No, it's not the endless compromising, or the live-in in-laws. But it does pertain to an uncle.
NEW YORK (CNNMoney.com) – For those bemoaning their single status on this Valentine's Day or who, conversely, are willing to use even the lamest excuse to avoid getting engaged this evening, consider this: while there are countless benefits to marriage, lower taxes often isn't one of them.
You've heard of the "marriage penalty." And you've heard that the penalty was reduced by tax relief laws.
But those laws didn't eliminate the penalty altogether. And in fact, there is more than one "marriage penalty" alive and kicking in the tax code today that the tax laws didn't even address.
The Tax Relief Act of 2001 provided marriage penalty relief in two ways:
• It made the standard deduction for joint filers double that for single filers (previously it was less than double).
• It created the 10 percent bracket and made the income ceilings for both the 10 percent and 15 percent brackets exactly double those for single filers (previously they were less than double for the 15 percent bracket). The amount of income subject to the 15 percent tax rate for tax year 2005 is between $7,300 and $29,700 for single filers and $14,600 and $59,400 for joint filers.
All joint filers benefit from these changes, but the couples who benefit the most are those whose taxable income doesn't exceed $59,400.
That's because the income ceilings are still less than double that for single filers in the 25 percent, 28 percent and 33 percent brackets. And in the top bracket of 35 percent, the income limit is the same ($326,450 and up) for both singles and joint filers.
Here's how much more a married couple filing jointly for tax year 2005 would owe than if they were two single filers with the same taxable income, according to the Tax Foundation:
Couple 1: Each spouse makes $71,950 in taxable income, which is adjusted gross income after taking deductions and personal exemptions. As joint filers the couple would pay $718 more than they would as single filers.
Couple 2: Each spouse makes at least $326,450 in taxable income. They would pay $19,530 more than they would as single filers.
Mind the AMT
The marriage penalty is also a factor in the Alternative Minimum Tax (AMT), the parallel tax system originally designed to insure the wealthy don't escape their tax burden.
The AMT disallows a number of deductions such as state taxes and property taxes that you normally can take, but you're only subject to it if your tax liability under the AMT is higher than under the regular tax code.
By marrying, you increase your susceptibility to the AMT, especially if you live in high-tax states (e.g., New York and California) and particularly in areas where salaries are high due to higher living costs, said David Sands, a tax partner at Buchbinder Tunick & Co., LLP in New York City.
That's because the amount of income joint filers may exempt from the AMT is just $58,000, not nearly double the exemption amount for single filers, which is $40,250. (For a look at why both exemption levels are so low considering the AMT is a wealth tax, click here.)
When you're dual-earners but not equal earners
When a couple marries and both spouses work, they are likely to go into a higher tax bracket because they've joined two incomes together.
But there is another penalty of sorts for two-income couples where one spouse's earnings are considerably lower than the other's.
The tax withheld on the lower income throughout the year often does not keep pace with the top tax rate on the couple's joint income. So, in effect, the money earned by the lower-income spouse is often more highly taxed than if that spouse were earning the same amount as a single filer, said Mary Mellem, an enrolled agent at Ashwaubenon Tax Professionals in Wisconsin.
Consider a couple in 2004 with two pre-school kids in Skokie, Ill. One spouse earns $80,000; the other, $40,000. They have a $200,000 mortgage at 6 percent, pay $5,000 in property taxes, generate $500 in taxable interest, make $15,000 in tax-deferred retirement contributions, contribute 2 percent of their income to charity, and pay $1,200 a month for daycare.
The couple would have owed $8,004 in federal taxes, Mellem said.
But if the lower-earning spouse hadn't worked, their family income would have shrunk from $120,000 to $80,000 -- a drop of 33.33 percent. Their tax bill, however, would have dropped 67 percent to $2,635 -- assuming they didn't incur childcare costs and they made a $2,000 deductible contribution to a non-working spousal IRA.)
(Of course, there are plenty of good (non-tax) reasons to have a second income. To see some of them, click here.)
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