The IRS imposes a separate set of income tax rates for married taxpayers filing jointly (as opposed to traditional unmarried individual rates). The rationale for having separate rates is a married couple is seen as a “single economic unit.” This unit typically shares bank accounts, makes joint financial decisions, and together incurs financial liability. Therefore, the legislature believes the couple should be taxed as one unit and be subjected to slightly different rates.
The Tax Code, though, has been criticized over the years for inconsistently applying these different tax rates. This inconsistency can be manifested in two ways: through (1) a “marriage penalty” or (2) a “marriage bonus.” The marriage penalty refers to instances of excess tax liability created by the married rates in comparison to lower rates (and liability) the couple would have enjoyed if unmarried. In other situations, the marriage rates allow couples to lower their total tax liability by filing jointly and, thus, they receive a “marriage bonus.” Put another way, it pays to be married in some circumstances while marriage is treated unfavorably in others.
Generally, the penalty/bonus distinction is dependent upon two major factors: (1) the ratio of earnings between the spouses and (2) the couple’s income level. Consider the following1:
(1) Spousal Earnings Ratio: Imagine Married Couple A earns $100,000 (taxable income) in 2012, including $20,000 from H and $80,000 from W. Imagine Married Couple B also earns $100,000 in 2012, except $50,000 from H and $50,000 from W. If either married couple files jointly, their 2012 tax liability will be $17,0602. However, if Couple A were unmarried and filed two separate individual returns, their combined liability would have been $18,4833. This $1,423 difference represents the marriage bonus received by filing as a married couple. Conversely, if Couple B were unmarried and filed two separate individual returns, their combined liability would have been $16,8574. This $203 difference represents the marriage penalty imposed as a result of filing as a married couple. These two scenarios illustrate how changes in the spousal earnings ratio can influence whether a couple receives either a penalty or bonus.
(2) Income Level: Imagine Married Couple C earns $400,000 in 2012, including $200,000 from H and $200,000 from W. If Couple C files jointly, its 2012 tax liability will be $109,1405. However, if Couple C were unmarried and filed two separate individual returns, their combined liability would have been $100,2626. This $8,878 difference represents the marriage penalty imposed as a result of filing as a married couple. Notice this penalty is 2.22%7 of Couple C’s taxable income while Couple B from above, despite also having an equal-earning spouses, only had a penalty of 0.20%8. Thus, the marriage penalty may be amplified when income increases.
NOTE: Married couples have an option to file as married individuals filing separate returns. By doing so, their tax liability may be either larger or smaller than if they filed jointly. For more information on filing options, please consult Filing Status Options.
1The following scenario’s use 2012 tax rate tables (see Section 3)
2The Married Filing Jointly tax rate table shows couples earning $100,000 are taxed at “$9,735 plus 25% of the excess over $70,700.” Thus, $9,735 + $7,325 (25% of $29,300) = $17,060
3The Unmarried Individuals tax rate table shows individuals earning $80,000 are taxed at “$4,991 plus 25% of the excess over $36,250.” Thus, $4,991 + $10,938 (25% of $43,750) = $15,929. Individuals earning $20,000 are taxed at “$893 plus 15% of the excess over $8,925.” Thus, $893 + $1,661 (15% of $11,075) = $2,554. Together the two individuals would have been taxed $18,483 ($15,929 + $2,554).
4The Unmarried Individuals tax rate table shows individuals earning $50,000 are taxed at “$4,991 plus 25% of the excess over $36,250.” Thus, $4,991 + $3,438 (25% of $13,750) = $8,429. Since both individuals earned that amount, together the couple would have been taxed $16,857 ($8,429 * 2).
5The Married Filing Jointly tax rate table shows couples earning $400,000 are taxed at “$105,062 plus 35% of the excess over $388,350.” Thus, $105,062 + $4,078 (35% of $11,650) = $109,140
6The Unmarried Individuals tax rate table shows individuals earning $200,000 are taxed at “$44,603 plus 33% of the excess over $183,250.” Thus, $44,603 + $5,528 (33% of $16,750) = $50,131. Since both individuals earned that amount, together the couple would have been taxed $100,262 ($50,131 * 2).
7$8,878/$400,000 = 2.22%
8$203/$100,000 = 0.20%
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