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Marriage Penalty or Marriage Bonus?

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Several years ago, a friend and I were discussing taxes.  One of his complaints was the frequently mentioned marriage penalty.  I pointed out that in his particular case, he and his wife were actually the recipient of a marriage bonus.

What is the marriage penalty?

Here is a table showing the upper limits for each tax bracket (taxable income) for tax year 2013 for the statuses of Single and Married Filing Jointly (MFJ), the two most common filing statuses.  Note that taxable income is not gross income, but has been adjusted for personal exemptions, deductions, and credits.

Rate Single Married Filing Jointly
10% $8,925 $17,850
15% $36,250 $72,500
25% $87,850 $146,400
28% $183,250 $223,050
33% $398,350 $398,350
35% $400,000 $450,000
39.6% All income > $400,000 All income > $450,000

Some of you may have already figured out where this is going by just looking at the tables. Let's do a quick example to illustrate the point.

Chris, Robin, Pat and Casey all make the exact same amount of money, $150,000.  The combined taxable income of Chris and Robin and the combined income of Pat and Casey is $300,000 in each case.

  • Chris and Robin are married, using the married filing jointly status.  They pay $75,313 in federal taxes.
  • Pat and Casey each pay $35,293.25 each in taxes, for a total of $70,586.50.

Chris and Robin are paying $4,726.50 extra in taxes simply because they are married.

Note that this is a very simplified example for the sake of illustration.  There are other wrinkles that come into play.

Why does the marriage penalty exist?

It is often said that "two can live as cheaply as one".  That's not true, of course.  However, a couple can quite often live more cheaply than two single people.  It's true that you need twice the food and twice the clothes as a single person, but you don't need twice the square footage in a house, two furnaces, two washers, two lawn mowers, two particle accelerators - the list goes on.

Essentially, a married couple with $300,000 in taxable income should have somewhat more disposable income than two single people whose combined income is $300,000.  (Of course, co-habitating people can reduce expenses similarly.)

The basic premise of tax theory is to spread the load based on the taxpayer's ability to pay, so for this reason, the upper limits of the married filing jointly brackets are not simply twice the limits of the single brackets.

Note that I'm just explaining the theory - I'm not taking a side on whether this theory is correct or fair.

The marriage bonus

I'm sure some of you think I'm blowing smoke when I mention the marriage bonus.  But let's tweak those income numbers a bit.  Both couples still have $300,000 in taxable income, but 90% is attributable to one partner and 10% to the other.

  • Chris and Robin still pay $75,313 on their combined taxable income of $300,000.
  • Pat pays $73,230.75 on a taxable income of $270,000.  Casey pays $4,053.75 on a taxable income of $30,000.  Combined, Pat and Casey pay $77,284.50.

Chris and Robin are receiving a "marriage bonus" of $1971.50!

Penalty or bonus?

Most often, the marriage penalty will occur when each spouse make a similar income.  The marriage bonus occurs when spouses have very different incomes.  The most common example of this would be when one spouse is a stay-at-home parent.

Posted on April 7, 2014.

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Tax

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18 Responses to “Marriage Penalty or Marriage Bonus?”

  1. leen says:

    Why do you take a sample of 0.1 percent of the population?
    50 plus 50 would be much more recognisable for most of us!

    • Lazy Man says:

      I’ll let Kosmo weigh in, but here’s my thought. If you pick examples where people make less the marriage penalty and bonus tends to disappear. I don’t think it would have been a very interesting article with lower wage earners such as 50K and 50K.

      While the examples themselves were of a small percentage of the population… even with the high-earners in these examples, the penalty/bonus is around 1% of the income (give or take).

  2. Kevin says:

    What also adds to the penalty of marriage is itemizing. Now, I can itemize, and my girlfriend choose not to(which is what we do since it maximizes our refund). If we get married we are forced to either both itemize or both not, or to file jointly, but since the standard deduction doubles then the effect is the same.

  3. kosmo says:

    @ leen and Lazy Man – Lazy Man nailed this. The penalty/bonus shrinks as the incomes go down. For the sake of illustration, a larger example makes the effect more visble. With 50+50, there would actually be no impact, since the upper limit of the MFJ bracket for that rate is simply double the limit of the upper limit of the single. We need to get up into the 25% bracket a bit before there’s an effect.

    @ Kevin – Yes, be able to split the decision of whether to itemize or not definitely has an impact, as do dozens (hundreds?) of other intricacies of the tax code.

  4. Kosmo says:

    @ Melanie – Everyone’s situation is unique, so you’ll want to run the numbers to be sure.

    I would definitely not make it the primary reason to get married, though (I’m not suggesting that you are).

    I’d definitely recommend that he track all of his work-related expenses. If he’s an employee, these will be itemized deductions. Even if you can’t itemize now, you may be able to in the future, so it’s good to get in the habit of tracking everything and saving receipts.

    If he’s self-employed, this will be part of his business income calculation on schedule C (even better than an itemized deduction).

  5. K says:

    This is an overly simplistic look at the marriage penalty. There is a very significant penalty when it comes to things like tax credits and deductions. Here is just one example
    IRA Deduction Limits
    http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

    Two single people with 52k AGI each, can make fully deductible IRA contributions.
    Married couple with 104k AGI can only make a partially deductible contribution.
    But wait.. it gets better.
    Two single people with 59k AGI still make a fully deductible contribution..
    However a married couple with 118k AGI gets ZERO deduction for IRA contribution (phased out at 115k.

    Hows that for a penalty?

  6. kosmo says:

    @K – yes, it’s definitely a simple look, as mentioned in the article. The main thrust of the article was to point out the existence of the marriage bonus in some cases. When the marriage penalty does exist, it definitely is a bigger factor for higher earners and those with more complex tax situations.

    I’ll counter your IRA example with this marriage bonus IRA example :)

    – Married couple has 95,000 modified AGI
    – Two single people with modified AGI of 69,000 and 26,000

    Both of the spouses in this case can take a full deduction, but only one of the single people can.

  7. K says:

    @Lazy
    The phaseout starts at 95k and ends at 115k.. so at 115k they deduct exactly zero.
    So the two single people deduct 11,000 between them (full contribution, no catch up). The married couple deducts 0.

    @kosmo
    As you pointed out with a very large difference in income there is a marriage bonus. However you have to hunt pretty hard to find that range.

    There is a certain income range that gets absolutely blasted by the marriage penalty.

    The $1000 child tax credit is another one.
    @Lazy since you just had another boy (congrats by the way)
    A married couple with two kids and an income of 105k, gets to deduct $2000.
    A married couple with 110k gets to deduct exactly ZERO.
    A single person gets the credit up to 75k, so up to 150k income for an unmarried couple.

    So counting just the IRA and Child tax credit the marriage penalty comes up to $4000 or more here.(assuming 2k credit, <20% tax rate)
    Keep in mind there is the additional penalty from the tax rate as well…

  8. kosmo says:

    @kosmo As you pointed out with a very large difference in income there is a marriage bonus. However you have to hunt pretty hard to find that range. – See more at: http://www.lazymanandmoney.com/marriage-penalty-or-marriage-bonus/#comments

    I suspect that this is a lot more common that you might think. There are a lot of married couples that have a big difference in income between one spouse and the other – such as cases where one spouse works outside the home. Personally, I know quite a few couples that fit this scenario. One spouse has a white collar job and the other stays at home with the kids, earning little, if any, income.

    I also suspect that 110K in household income may also be less common than you think. Only 12.4% of returns in 2009 had adjusted gross incomes of greater than 100K, and some of these would have been single people – and of course, it’s only a subset of the entire range that is the marriage penalty trap zone.

    http://www.irs.gov/pub/irs-soi/09in23ar.xls

  9. kosmo says:

    Note that I’m not suggesting that the marriage penalty doesn’t exist or even that the marriage bonus is more common. I’m simply pointing out the existence of the marriage bonus, since it gets virtually no mention in the press.

    As for the marriage bonus thresholds to be more difficult to determine, this is only because two returns means twice as much math – but really, this means about 10 seconds instead of 5. It’s not rocket science to figure out.

    Also, note that the rate difference doesn’t occur until married taxable income reaches $146,401, since the upper bounds of the 10 and 15 percent bracket for married status is simply twice the income for single.

  10. K says:

    Not to start a comment war, but you fault me for using an example of 110k and you use an example of 300k? seriously?
    The income of 110k is about 20% of married couples, and significantly more than 12% (if you look at more recent stats.
    If you think the marriage penalty only affects upper middle income households, take a look at the Earned Income Credit.
    http://www.irs.gov/Individuals/EITC-Income-Limits,-Maximum-Credit–Amounts-and-Tax-Law-Updates
    Two kids max 43k for single filer.
    Two kids married max at 48.3k for 2013.

    For two single people with kids making 25k its 2,000 credit each, 4000 total.
    For one married couple making 50k, its nothing.

    This by the way represents the median income and the median number of children..

  11. kosmo says:

    Where does the 20% figure come from? I’m always looking for good, verifiable data (i.e. government sourced). There are a lot of figures floating around, but a lot of them have a pretty hazy basis in reality. I’ve tended to gravitate to the IRS web site, since they have the source data.

    I openly admit that my examples are not common and were used to exaggerate the effect, for the purpose of illustrating what the penalty/bonus are. If I had used smaller incomes, the tax difference would have shrunk dramatically.

    Again, my point isn’t that the marriage penalty doesn’t exist – it’s that the marriage bonus does exist in a lot of cases.

  12. K says:

    If you want good data.. go to the source.

    2013 supplement to US Census
    https://www.census.gov/hhes/www/cpstables/032013/hhinc/hinc01_000.htm

    It looks like nearly 1/3 of married couples have an income of 110k.

  13. kosmo says:

    Wow. Those distributions are very different than what the IRS data has. I just checked the most recent data from the IRS (tax year 2011) at http://www.irs.gov/pub/irs-soi/11in23ar.xls ) and the percentage of returns above 100K is 13.4%, a slight bump from 2009.

    The census is a much smaller sample (120K households), since the IRS data is a “sample” of 100% of the returns, but if there isn’t significant sampling bias that should still be a pretty decent sample size.

    I’ll have to dig around and see if there are methodology differences. It seems pretty unlikely that the average incomes shifted that much in one year, so the most logical explanation is that they are measuring different things. They almost certainly define income differently than the IRS and are using “household” whereas IRS is using returns – and a household can have multiple returns.

    You’ve piqued my interest.

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