Friday, January 11, 2013

Marriage Penalty

The passage of the “Fiscal Cliff Act” or its real name American Taxpayer Relief Act of 2012 has reminded me of the tax marriage penalty.  This has not been discussed much.
The marriage penalty refers to the higher taxes required from some married couples, where spouses are making approximately the same taxable income, filing one tax return  than for the same two people filing two separate tax returns if they were unmarried. It works to the couple’s advantage when there is a large difference in their incomes. The source of this increase in taxes has its roots in the progressive tax-rate structure in income-tax laws where the combined income of the parties puts them in a higher tax bracket. This law probably discourages some people from getting married. Going back to the “fiscal cliff act,”  it increased marginal income and capital gains tax rates relative to their 2012 levels for annual income over $400,000 ($450,000 for couples) and  phased-out of certain tax deductions and credits for those with incomes over $250,000 ($300,000 for couples).  Note the items in parentheses.  If I understand the act properly a married couple’s tax rate increases when their combined income is in excess of $450,000.  If the same two people were not married it would increase when their combined income was over $800,000. Once again this encourages people not to get married. 
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