Marriage is the peak celebration of monogamy in our country, and newlyweds often believe that they will receive a legal and financial benefit commensurate with that of everlasting love. I’m talking, of course, of a tax break. However, this tax break is hardly guaranteed.
Similar to the “marriage bonus,” the “marriage penalty” tax occurs as a result of our nation’s progressive federal income tax rates and the treatment of the family as a single taxable unit. Of the four federal income tax classifications (single, married filing jointly, married filing separately, and head of household) available to Americans, the marriage penalty occurs when a married couple filing jointly pays taxes in an amount that exceeds what that same couple would have paid had they filed as singles.
Here is a simple illustration using a calculator provided by the Tax Policy Center that reflects the 2015 Tax Rate Schedules:
Suppose we have a couple, and each individual is earning the 2013 U.S. mean income of $51,915. After their personal exemption ($4,000) and standard deduction ($6,300), they can each expect to pay about $6,209 in federal income tax. Now, suppose these two individuals get married and file jointly. After their personal exemptions ($8,000) and standard deduction ($12,600), they can expect to pay about $12,418 as a married couple, or $6,209 each. Here, the newlyweds break even, and there is no marriage penalty imposed.
Now let’s suppose we have a different couple, and each individual earns $100,000. Filing as singles, and after taking their personal exemption and standard deduction, they can each expect to pay about $18,230 in federal income tax. Like our first hypothetical couple, these two now decide to marry and file jointly. After their personal exemption and standard deduction, these newlyweds can expect to pay about $37,315 as a couple, or $18,657.50 each. Here, a marriage penalty has occurred. Our hypothetical spouses can each expect to pay $427.50 more than they would have had they filed as singles simply because they are married filing jointly.
This is obviously a simple hypothetical. A host of other circumstances can affect an individual’s federal income tax liability, such as mortgages, children, and charitable donations, and all of these factors can have an impact on whether or not the couple will experience a marriage penalty. While the progressive design of U.S. federal income tax rates may immediately result in higher taxation of those with higher incomes, couples with disparate earnings are unlikely to experience a marriage penalty. Rather, the major determinant of whether a couple experiences the marriage penalty is how equal the couple’s earnings are. Moreover, even low-income couples with equal earnings may have trouble escaping a marriage penalty — especially those families receiving the Earned Income Tax Credit.
While a marriage penalty is inherent in our current tax system, the nation’s federal income tax laws, as they pertain to families as a taxable unit, have undergone major overhauls during the last century. From a “community property“system, to an “income splitting” system, our current system arose out of the Tax Reform Act of 1969. Prior to this Act, married couples enjoyed tax liabilities that were substantially less than those owed by single individuals. However, the Tax Reform Act established a new tax rate for single taxpayers that sought to alleviate the previous inequalities between single and married taxpayers.
Predictably, the marriage penalty tax has never been popular. One couple even divorced three times during the 1970s just to avoid the marriage penalty, only to remarry after filing their taxes as singles. While many couples understandably express discontent at having to pay a penalty simply because of their marital status, perhaps those who deserve to be the most upset are women.
By offering marriage bonuses (typically for a couple’s disparate incomes) and imposing marriage penalties (typically for a couple’s equal incomes), our current federal income tax system seems to discourage women in the workplace. Consider these numbers: in 1970, shortly after passing the Tax Reform Act of 1969, women constituted 38% of the labor force, while men constituted 62%. In 2012, women constituted 47% of the labor force, and men constituted 53%. Further, of married couples in 1960, just over 6% had women as the primary breadwinner of their households. ‘By 2011, however, that percentage increased to 24%. The passage of the Tax Reform Act created a marriage penalty at a time when the notion of having a male primary breadwinner was embraced, but it is no secret that women are moving themselves into the American workplace after decades of lower workforce participation. However, even though the number of dual-income families is rising, couples still risk being penalized for having equal earnings, and penalizations will likely increase until our current system is amended.
So how do we reform this antiquated system? Married filing separately does not seem to fully alleviate the problem. One option would be adopting a structure much like the one currently in place in the U.K., where instead of married filing options, couples are required to file individual, single tax returns. However, the drawback to this solution is a shift of focus from the family as a single, taxable unit to the individual, meaning a family with a single breadwinner will pay more in federal income tax than a dual-income family earning an equivalent amount. Any route proposed or taken will naturally present difficulties and drawbacks, as our nation’s intricate tax system can require enormous political will to change. However, the days of the single, male breadwinner being a staple of the American home are over, and we should expect nothing but a continual rise in the number of women entering the workforce. If we desire our tax law to evolve with our societal norms, then it is time to update our federal income tax system.
Published on November 17, 2015.