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What is the marriage penalty and how does it affect our tax returns?
There are probably several marriage penalties we can discuss such as who gets to park in the garage, who gets the most cabinet space in the bathroom, etc. but we are here to say that the marriage penalty as it relates to taxation is all but over, for most people. There is a gotcha associated with tax withholdings for married folks, but for now we’ll provide some background.
Originally the marriage penalty was a perception based on two people earning the same amount of income would pay less taxes individually than being married and filing jointly. However, even before the 2001 Congress which acted and basically eliminated most of the disparities, the marriage penalty was elusive and mythical, like a unicorn if you will- according to the 1996 Congressional Budget Office (CBO) 51% of married couples paid less tax jointly than if they had not been married. Average savings was $1,300. Interestingly, the more disparate the income the bigger the savings.
Ok. Back to 2001- to put the issue more to rest, Congress decided to double the standard deduction amount and double the income brackets (at least the lower ones). These were the major issues contributing to a possible marriage penalty- now, one plus one actually equals two, and not one and a half.
Still want to file separately? Not convinced? Here is some more penalty food for marriage thought- by preparing your taxes as married filing separately (MFS), you are not eligible for tuition and fees deductions, student loan interest deduction, child and dependent care credit, earned income credit and American Opportunity / Lifetime Learning educational credits, among other more obscure deductions. Financially, there are generally no good reasons to file separate tax returns if you are married.
There is one remaining marriage penalty issue, and it deals with disparate incomes between the spouses. When payroll tables are used to determine the amount of tax withholdings, they cannot predict or envision the other spouse’s income. So, if spouse A is earning $25,000 while spouse B is earning $100,000, spouse A will not withhold enough taxes when the incomes are combined since the payroll tables assume that spouse B earns a similar amount.
Specifically, spouse A will have withheld about $2,900 and spouse B will have withheld about $17,250. However, with the incomes combined the couple should have withheld $23,500 a shortfall of $3,350 (assuming 2011 tax tables). This is a generalization, and your mileage may vary considerably because of deductions, credits, etc. but it is something to consider nonetheless. Proper selection of exemptions and additional withholdings can prevent a tax shock next year.