One of the objectives behind a progressive income tax structure is to achieve a redistribution of wealth by imposing higher taxes on those who earn more compared to those who earn less. Tax laws are therefore written to tax higher incomes at rising rates with fewer exemptions. Due to this structure, married couples filing jointly may end up with a higher joint federal income tax liability compared to what they would incur collectively if they remained single and filed as single individuals. This “marriage penalty” exists if both spouses have fairly similar taxable incomes. It is worth noting that the marriage penalty “is not a statutory item in the tax code but rather arises from other provisions of the tax law” (Leslie A. Whittington and James Alm, “Tax Reductions, Tax Changes, and the Marriage Penalty,” National Tax Journal, September 2001, http://bit.ly/2A4lvJ3).
The issue of the marriage penalty arose decades ago; several times, the government has offered relief to married couples by increasing deductions, raising the starting point of each tax bracket, offering credits, or changing other rules. Major tax legislation of the last two decades—such as the Taxpayer Relief Act of 1997, the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Working Families Tax Relief Act of 2004, the American Recovery and Reinvestment Tax Act of 2009, and the American Taxpayer Relief Act of 2012—all tried to eliminate the marriage penalty, but managed to only alleviate it. The newly enacted Tax Cuts and Jobs Act of 2017 (TCJA) is not much different.
This article demonstrates that, while the TCJA has offered some relief to married couples filing jointly by either eliminating or minimizing the marriage penalty in a few areas, the penalty persists in other areas. It describes how the penalty worked prior to the TCJA, especially when couples had similar amounts of income, and analyzes the provisions of the TCJA to show where the marriage penalty no longer exists, where it has been diminished, and where it persists.
What is the Marriage Penalty?
“A marriage penalty results when a married couple pay[s] more taxes by filing jointly than they would pay if each spouse could file as a single person … The marriage penalty fundamentally results from progressivity of the Tax Code” (Bruce R. Bartlett, “Tax Reform: Doing Away with the Marriage Tax Penalty,” Vital Speeches of the Day, April 1998, http://bit.ly/2LnWJrr). The reason more people are experiencing the marriage penalty in recent years may be partly that both the percentage of women in the work-force and women’s earnings as a percentage of men’s have risen in the past few decades (Women in the Labor Force, U.S. Department of Labor Women’s Bureau, http://bit.ly/2SRdQEI). This supports the claim by Nada Eissa and Hilary Williamson Hoynes that “as secondary earnings rise; the tax system becomes more penalizing towards marriage” (“Explaining the Fall and Rise in the Tax Cost of Marriage: The Effect of Tax Laws and Demographic Trends, 1984–97,” National Tax Journal, 2000, http://bit.ly/2R1Uwaz).
The marriage penalty has been discussed and studied many times. Prior literature has studied (albeit without a firm conclusion) the claim that removing the marriage penalty is essential for the success of the American family because it harms the institution of marriage and the concept of family (Frederick J. Feucht, Murphy Smith, and Robert Strawser, “The Negative Effect of the Marriage Penalty Tax on American Society,” Academy of Accounting and Financial Studies Journal, December 2010, http://bit.ly/2ErZIxJ) and is thus detrimental to society’s interests (Floyd W. Carpenter, Dennis Lassila, and Murphy Smith, “The Federal Government’s War on Marriage aka the Marriage Penalty Tax: Unfair to Individuals and Harmful to Society,” Journal of Legal, Ethical and Regulatory Issues, December 2013, http://bit.ly/2Ey3LJH). Some have even posited that one of the reasons behind the divorce rate in the United States is the related income tax implications (Whittington and Alm, “Til Death or Taxes Do Us Part: The Effect of Income Taxation on Divorce,” Journal of Human Resources, Spring 1997, http://bit.ly/2PJt6S9), and others have claimed that marriage penalty could affect even low-income earners and encourage them to hide their marital status to avoid paying higher taxes (Stacy Dickert-Conlin and Scott Houser, “Taxes and Transfers: A New Look at the Marriage Penalty,” National Tax Journal, June 1998, http://bit.ly/2Lmg8Js).
The authors do not take a philosophical position about the potentially negative effects of the marriage penalty tax on the ability or willingness of individuals to marry and stay married. Instead, the authors take the viewpoint that the marriage penalty tax is unjust because it causes an unequal tax burden based merely on a change in marital status. Moreover, the unjust treatment follows taxpayers in many areas of their financial lives, such as when they receive Social Security benefits. The intent of this article is to reemphasize the need to address the issue of equitable treatment within the context of a taxpayer’s martial status. This article also analyzes the significant changes introduced with the TCJA, which generally diminishes the penalty in some areas, but continues it in others.
While the TCJA has offered some relief to married couples filing jointly by either eliminating or minimizing the marriage penalty in a few areas, the penalty persists in other areas.
Until the end of 2017, when a couple married and filed jointly, and their incomes were approximately the same, the marriage penalty would kick in simply because the couple would be in a higher tax bracket than the single individuals. If only one of the two individuals were earning income, or if the two incomes were disparate, there would be no marriage penalty. In fact, in some situations, a “marriage bonus” would result when either of the two spouses had no taxable income, or had taxable income significantly lower than the other spouse’s. A married couple filing jointly would fall into a penalty situation beginning with the 28% tax bracket, which began at $153,100 and ended at $233,350; for singles, the 28% bracket began at $100,000 and ended at $191,650. Note that the threshold for couples is not double the threshold amount for singles. As shown in the following example, the marriage penalty under the TCJA begins at the 35% bracket, which begins for married couples filing jointly at $400,000 and at $200,000 for singles—note that this threshold for couples is exactly double that for singles. The 35% bracket ends at $600,000 for married couples, however, whereas singles do not move into the 37% bracket until they earn $500,000. This diminishes the impact of the tax bracket–based marriage penalty for the large portion of married couples who jointly earn less than $400,000. The income thresholds before the penalty tax emerges are much higher than before, which is good news for married couples who file jointly.
John and Mary got married on June 1, 2017. They each had earned income of $150,000 in 2017 and 2018. They have no children and $15,000 in itemized deductions per person in both years. They are under 65 and not blind. Their taxes for 2017 and 2018, when married filing jointly and filing as single, would be as shown in the Exhibit. The income tax jointly owed by John and Mary as a married couple is $2,348 higher in 2017 (without considering the additional Medicare tax of 0.9%), compared to what they would have paid if filing single as a result of moving from the 28% bracket as singles to the 33% bracket as a married couple. Under the TCJA, however, they collectively would pay the same tax in 2018, whether filing jointly or as single.
2017 and 2018 Tax Comparisons
Additional Medicare Tax, Net Investment Income, and Capital Gains
The 0.9% Additional Medicare tax, as well as the Net Investment Income Tax (NIIT), remains unchanged under the TCJA. Both taxes continue to impose a significant marriage penalty on taxpayers who are considered high-income earners. These taxes continue to apply at $200,000 for single taxpayers and at $250,000 for married filing jointly; thus, a married couple filing jointly, where each spouse makes $190,000 in earned income, will owe an additional $1,170 ($130,000 × 0.9%) in tax, compared to owing nothing if they remained single.
The penalty is even more significant if some of these earnings are investments. Using the above example of John and Mary, suppose that they individually receive $40,000 as net investment income in addition to their $150,000 in earned income. As singles, neither taxpayer owes the NIIT since each is still below the $200,000 threshold. As a married couple, however, they will owe an additional $3,040 (i.e., 3.8% of the lesser of the actual joint net investment income ($80,000) or the amount in excess of the threshold ($130,000). Added to the 0.9% additional Medicare tax of $450 (based on $50,000 of joint earned income above the threshold), this makes a total of $3,490 in additional tax owed when filing jointly.
The capital gains tax rates, and the additional long-term capital gains tax for high-income individuals, also continue to exist under the TCJA. The thresholds remain uneven at $425,800 for singles and $479,000 for married filing jointly. Once the threshold is reached, long-term capital gains are taxed at 20%. If the taxpayers remained single, they would be able to make $851,600 (i.e., $425,800 × 2) collectively before they would have to pay the additional 5% in capital gains tax in 2018. As married taxpayers filing jointly, however, they would reach the threshold much sooner at $479,000 and end up paying a capital gains rate of 23.8% (including the NIIT of 3.8%). Thus, the TCJA retains the marriage penalty on long-term capital gains for high-income earners.
Social Security Benefits
One does not need to have a substantial income to owe additional taxes through the marriage penalty. Those couples receiving Social Security benefits can pay dearly for filing jointly. The 2017 taxable thresholds were $25,000 and $34,000 of modified adjusted gross income (MAGI) for 50% and 85% of Social Security benefits, respectively, to be taxable if single. For those who were married, 50% of Social Security became taxable at $32,000 and 85% became taxable at $44,000. Clearly, married couples filing jointly paid higher taxes sooner than those filing as single. None of these income thresholds were changed by the TCJA, which thus continues to exhibit a marriage penalty, potentially making it financially harder for those elderly individuals who may be considering marriage.
Earned Income Tax Credit
The earned income tax credit (EITC) is a refundable tax credit for low-income taxpayers who have earned income. The purpose of the credit was to encourage work by providing some assistance for low-income earners. Looking at where the credit phases out, whether one has no qualifying children, or one, two, or three children, there is a tremendous disadvantage to filing jointly as a couple. The law remains as it was prior to the TCJA in all respects, except for the increases in the phaseout amounts. For 2018, the maximum amount of income a single filer can earn (married filing jointly in parentheses) and still take the EITC is—
- $15,270 ($20,950) with no qualifying child and at least 25 years old and under 65;
- $40,320 ($46,010) with one qualifying child;
- $45,802 ($51,492) with two qualifying children; or
- $49,194 ($54,884) with three or more qualifying children.
The significant disparity between singles and joint filers continues to exist; the phase-out hits much faster for married filers, and is far less than twice the single-filer amount in each category.
The TCJA clearly has not removed the marriage penalty tax for taxpayers who qualify for the EITC. In fact, the marriage penalty affects even low-income and moderate-income earners where the EITC is concerned, which may explain why Chris Herbst (“The Impact of the Earned Income Tax Credit on Marriage and Divorce: Evidence from Flow Data,” Population Research and Policy Review, February 2011, http://bit.ly/2rHLaTi) concluded that increases in the EITC had a negative association with marriage rates among low-income individuals.
The proceeds of Series I and EE Bonds may be used for financing education. For 2018, the exclusion of interest income from these bonds for single taxpayers begins at MAGI of $79,700 and is completely phased out at $94,700. The phaseout for married taxpayers begins at MAGI of $119,550 and is completely phased out at $149,550, which is far less than double the single amounts.
The adoption exclusion results in even more disparate treatment by marital status. The phaseout begins at MAGI of $207,140 and phases out completely at $247,140 for all taxpayers. While this is relatively high, it is clear that the joint income of a married couple where both spouses have income would reach the threshold much faster than that of a single taxpayer. This is another example of how the TCJA has done nothing to alleviate the marriage penalty.
Child Tax Credit
The child tax credit can be taken for up to three children and in some cases can be partially refundable. Prior to 2018, the phaseout was significantly disproportionate: $75,000 of adjusted gross income (AGI) for single taxpayers and $110,000 for married filing jointly. Under the TCJA, the phaseout now begins at $200,000 for single taxpayers and $400,000 for married filing jointly. Thus, taxpayers who earn $200,000 or less when single, or $400,000 or less when married filing jointly, will continue to fully enjoy the child tax credit. This is one area where the disparity between filing as single and as married filing jointly has been removed by the TCJA.
Individual Retirement Accounts
The traditional and Roth Individual Retirement Accounts (IRA) and their accompanying tax benefits were created to encourage people to save enough money to retire comfortably. With a traditional IRA, one can deduct up to a certain amount from the taxable income up front, while money put into a Roth IRA on an after-tax basis grows tax-free and is not taxed when withdrawn, assuming certain conditions are met. Deductible contributions under traditional IRAs, however, are subject to phaseouts if one or both parties to the marriage are active participants in an employer’s pension plan. In 2017, a single individual’s deductible contribution phased out between $62,000 and $72,000 of MAGI, while for married individuals filing jointly who were both participating in employer-sponsored retirement plans, it phased out between $99,000 and $119,000, far less than twice that of a single taxpayer. Under the TCJA, the phaseout ranges in 2018 have increased slightly, to $63,000–$73,000 for singles and to $101,000–$121,000 for married filing jointly, and clearly remain disproportionate.
Those couples receiving Social Security benefits can pay dearly for filing jointly.
In 2017, Roth IRA contributions were also limited by MAGI. For single taxpayers, the phaseout range began at $118,000 and ended at $133,000; for married filing jointly, the range was $186,000–$196,000, again giving a significant advantage to those who were single. In 2018, the phase-out ranges increased to $120,000–$135,000 for singles and to $189,000–$199,000 for married filing jointly. Thus, the TCJA did not remove the disparity for either traditional IRAs or Roth IRAs.
Alternative Minimum Tax
The alternative minimum tax (AMT) was meant to ensure that wealthy taxpayers could not avoid all tax liability by taking advantage of tax shelters, preferences, and loopholes. In recent years, however, many more taxpayers have become subject to AMT, which computes income differently than the regular income tax and whose brackets are not indexed for inflation. Congress has continually tried to fix the problems with the AMT, but one problem it has failed to address is the difference in its impact on single filers and those who are married and filing jointly. For example, the AMT exemption in 2017 was $54,300 for singles and $84,500 for married filing jointly. Unfortunately, the TCJA did not remove this disparity, although it did increase the exemption amounts to $70,300 for singles and $109,400 for married filing jointly.
The marriage penalty has been removed, however, with respect to the phaseout thresholds, which are now increased to $500,000 for singles and $1,000,000 for married filing jointly. Prior to the TCJA, these exemptions began to phase out at $120,700 for singles and $160,900 for married filing jointly. Thus, the TCJA offers some relief to high-income married couples in terms of not losing the total exemption amount until reaching a proportionately higher income threshold.
Personal Exemptions and Itemized Deductions
Personal exemptions and itemized deductions affect middle-income taxpayers more commonly than very low-income or very high-income taxpayers. Reformers have long wanted to make tax filing easier for the individual taxpayer; one way of doing this, while also eliminating some of the impact of the marriage penalty, would be to eliminate personal exemptions and itemized deductions. To this end, the TCJA raised the standard deduction to $12,000 for single taxpayers and $24,000 for married filing jointly. The amount for married couples is exactly double that of the single filer, as has been the case in the past. The phaseouts that applied to personal exemptions prior to 2018 were not equal, and married taxpayers would lose their exemptions much quicker than single taxpayers. With the personal exemptions no longer available, this is no longer an issue.
While many itemized deductions are now gone, the phaseout of a percentage of itemized deductions for high-income taxpayers (Pease amendment) has also been eliminated. Because the standard deduction is equalized at $12,000 and $24,000 for single and married filing jointly, respectively, the marriage penalty may appear to not exist in this area, especially since the phaseouts are also gone. This is not completely true, however, as the following example will show.
Steve is single and has the following deductible itemized deductions: State and local income taxes and property taxes, $7,000; home mortgage interest, $4,000; and charitable contributions, $2,000. Henry and Wendy are married and have the following deductible itemized deductions: state and local income taxes and property taxes, $14,000; home mortgage interest, $8,000; and charitable contributions, $4,000. Steve, being single, can itemize his deductions of $13,000 ($7,000 + $4,000 + $2,000), which is greater than the standard deduction of $12,000. Henry and Wendy, on the other hand, will use the standard deduction of $24,000, which is greater then their allowable itemized deductions of $22,000 ($10,000 in taxes + $8,000 interest + $4,000 charity). This is because state and local income and property taxes are capped at $10,000 under the TCJA for both single and married persons. This penalizes married couples who both work and both have deductions that are exactly twice those claimed by a single taxpayer. In many states, the state income tax alone would most likely exceed the $10,000 cap, let alone property taxes. In a more equitable situation, the cap on the SALT deduction would be $20,000 for married taxpayers. Once again, under the TCJA, the marriage penalty thus has not been eliminated from standard and itemized deductions.
A More Equitable Solution
Although the marriage penalty has existed within the tax code for many years, it is unfair because of the effect that it has on the tax liability of an individual based on marital status. The more a married couple earns in taxable income, the more they feel the penalty. The alternatives to avoiding the higher tax liability for a couple filing jointly would appear to be to (a) make less money, (b) get divorced and file separately, or (c) just remain single. Regardless of whether the marriage penalty was an intentional or accidental outcome of the tax law, it still exists today in several areas of the tax code, as illustrated above.
Congress has tried to fix this disparity, with the TCJA as the latest effort. The TCJA does diminish the penalty in areas such as the income tax brackets, the child tax credit, and alternative minimum tax exemption phaseouts. But it does not remove the disproportionality between the thresholds for the single and married-filing-jointly filing statuses across many different areas.
Removing the marriage penalty entirely may conflict with the social objective of reducing the inequalities between low- and high-income earners. Nonetheless, the authors support the argument that the marriage penalty is not only unjust but also unethical. While the authors do not believe that the marriage penalty harms the institution of marriage, as has been claimed by some of the past literature, it does seem questionable simply based on the issue of fairness. The simplest way to eliminate the marriage penalty is to have a single filing status that all taxpayers can use, which will also simplify tax filings in general while keeping the tax system progressive.
Major Tax Advantages/Disadvantages of the Married Filing Jointly Status
- In situations where one of the two spouses earns significantly less than the other or has no taxable income at all, filing jointly can result in a “marriage bonus” by reducing the couple’s joint tax liability due to falling into a lower tax bracket.
- In addition, in the situation described above, the joint medical expenses of the couple may qualify for an itemized deduction.
- When filing jointly, a spouse with no taxable income can still contribute to a Spousal IRA as long as the other spouse has taxable income and the amount of the combined IRA contribution does not exceed the joint taxable income.
- Many married couples filing jointly end up paying a marriage penalty in many areas of taxation, as illustrated in this article.
- If both spouses have similar individual taxable incomes but only one spouse has unusually high medical expenses, such expenses may not qualify for deduction based on the combined income.
- When filing jointly, both spouses are equally responsible for the accuracy and truthfulness of the joint tax return.