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|
|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.