Understanding the Marriage Penalty

The Internal Revenue Service tax code is often unfavorable to married couples, resulting in what has come to be known as the marriage penalty. The marriage penalty is not an official penalty. Rather, it is simply a term used to describe the fact that some married couples will pay more in taxes than they would if they were two single individuals filing separately. The marriage penalty used to be extreme, but some changes have occurred in the code to help make the penalty less severe.

Historical Changes in Marriage Taxes

The first marriage penalty was imposed in 1969. Prior to this time, the argument could be made that the tax code favored married couples. At that point, the income-splitting code was put into place. This new code made it expensive to be married to an individual who earned close to the same amount of income as you did. The more similar your two incomes, the higher the tax bracket you would collectively be in, whether you filed jointly or separately. This led to complaints about the new laws, and another change came in 2003.

Jobs and Growth Tax Relief Reconciliation Act of 2003

In 2003, a new law equalized the standard deduction for married couples. Further, the new law increased the amount of joint income a married couple could have while remaining in the 15 percent tax bracket. This change was part of a larger series of tax cuts often called "The Bush Tax Cuts" after President George W. Bush, as the tax cuts were introduced during his tenure in office. It is unclear whether these cuts will remain in place into the future or be repealed at some point down the line. However, they are not likely to be repealed during President Obama's Administration, according to his early statements on this policy.

Overcoming the Marriage Penalty

Once a married couple has at least one child, the tax benefits of having a dependent will typically overcome the penalties for the marriage tax. Further, there are several ways to save on marriage penalties simply with smart spending and filing. First, it may make sense for the individual with a lower income to make certain tax-deductible purchases while others should be reserved for the higher-income individual. If the couple is filing jointly, it will not matter which person makes the deduction. Speak to a tax professional about minimizing your tax bracket as a married couple in order to overcome this tax disparity.

Retirement Savings Exception

It is important to look into retirement savings as a creative method for reducing tax liabilities that may be caused by the marriage penalty. Traditional IRAs and 401(k)s, which are tax-deferred savings accounts, are not subject to the marriage penalty laws when you file your taxes. As a result, it is advisable to supply the maximum possible to these accounts. You will be capped each year depending on the structure of your retirement account, your income and your age, but, when possible, adding the maximum possible to the account will reduce your tax penalty despite this cap. 

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