When a married couple’s combined tax liability is calculated to be either higher or lower than it would have been had they remained single, this is known as the marriage penalty or marriage bonus. Whether you receive a tax bonus or a penalty depends on the amount of income generated by you and your spouse, and how that income is divided between you. Penalties impact couples when both partners have either very high or very low incomes, while bonuses affect many middle-income couples with disparate incomes.
What is the marriage tax penalty?
Two working individuals with identical incomes are often shocked to find themselves in a higher tax bracket once they have married. Many high-income couples have discovered that their marginal tax rate increased after their nuptials – an effect known as the marriage tax penalty. The impact of this penalty will vary for each couple, and it could amount to up to 12% of income.
The income tax code becomes increasingly progressive for married filers, particularly as taxable income rises. In 2016 – for instance – a single filer can have taxable income of up to $91,150 without exceeding the 25% marginal income tax rate. On the other hand, married couples filing jointly cannot exceed $151,900 in combined taxable income to stay within the same 25% marginal tax bracket. Newlyweds also face the prospect of having to pay Additional Medicare Tax. While single filers only pay the .9% Additional Medicare Tax if their taxable income exceeds $200,000, married taxpayers filing jointly have a threshold that is a mere 25% higher: $250,000.
What is the marriage tax bonus?
Couples earning disparate incomes may be rewarded with a marriage tax bonus. This most often occurs when a higher-earning individual marries and files jointly with someone who has little to no income. Situations in which one spouse stays at home or has a part-time job are most likely to result in a marriage bonus. The extent to which the marriage bonus lowers a couple’s tax bill depends upon their level of combined income, the variance between their incomes, and how many children they have. The additional income from the lower-income spouse is seldom high enough to push the couple’s combined income into a higher tax bracket. Thus, the higher-income spouse might be able to move into a lower marginal tax bracket – thanks to their combined income. For example, suppose an unmarried couple earned a total of $75,000 – with $50,000 going to the first partner and $25,000 to the second – giving them a combined tax bill of $13,200. When they marry and combine their incomes, their taxable income stays the same, but their tax brackets widen. This means that less of their income is taxed at the 25 percent marginal rate than was previously the case, reducing their combined tax bill by $225. Therefore, when one spouse earns all of the couple’s income, they will never incur a marriage penalty, and nearly always receive a marriage bonus instead.
Increase tax-deferred account contributions
Dual incomes allow married couples to invest more cash in pursuit of their financial goals. Increasing your qualified retirement plan contributions reduces your overall taxable income. Depending on your income level and whether or not you’re covered by a plan at work, you may qualify to make tax-deductible contributions to an IRA, as well.
Weigh employer benefits
If you and your spouse are both full-time workers, it pays to compare available benefit packages. Since the specifics of health plans – as well as coverage costs – vary among employers, it’s often worthwhile for a couple to use the same insurance. Flexible spending and health savings accounts are optional benefits that may reduce your taxable income.
Changing your marriage status on your W-4 without increasing your withholding can generate a large tax bill the following April. Avoid penalties and interest from underpayment of income taxes by correctly estimating your future tax bracket, expected tax liability, and quarterly payments.
Marriage changes everything – including your taxes. Contact Werba Rubin for a comprehensive review of your tax picture, leading to a happier return next April.
The information herein is general in nature and should not be considered insurance, legal or tax advice. Please consult with an insurance legal or tax professional for additional information on specific situations.
Investment advisory services provided by Werba Rubin Wealth Management, LLC (“Werba Rubin”). Securities transactions are offered through a non-affiliated entity, Loring Ward Securities Inc., member FINRA/SIPC.