What Is the Marriage Penalty?
While the contemplation of marriage is largely a matter of the heart, there are often unavoidable federal and state tax implications for those who tie the knot. According to the Tax Foundation, a married couple's income may be subject to a penalty of up to 12% if they have children and up to 4% if they don’t. This model assumes taxpayers use standard deductions and report only wage income. But not every married couple faces marriage penalties. In fact, some may even enjoy marriage bonuses.
- After marrying, some couples will take a tax hit, while others may enjoy a marriage bonus.
- Spouses with similar incomes—be they high or low—are more likely to experience marriage penalties.
- Couples with disparate incomes are more likely to experience marriage bonuses.
- The Tax Cuts and Jobs Act, effective as of the 2018 tax year, has made changes that both improve and worsen the impact of marriage penalties.
Understanding the Marriage Penalty
Marriage Penalty Scenarios
A variety of factors may influence whether or not a couple will face a marriage penalty, including individual and combined incomes, the disparity between said incomes, and the number of children the couple has. Specifically, the following situations may trigger marriage penalties:
Low Earners With Similar Incomes
Low earners often qualify for the earned income tax credit (EITC). Designed to encourage individuals to maintain their jobs, this initiative provides a credit of up to $6,660 for the 2020 tax year ($6,728 for 2021), depending on filing status and the number of children who may be claimed as dependents. When marriage increases a low-earning partner’s household income, the EITC may diminish or disappear altogether. In such cases, a couple may have a lower after-tax income if they marry than if they remain unhitched.
The American Rescue Plan, signed by President Biden on March 11, 2021, includes generous tax breaks to low- and moderate-income people. For 2021 only, the size of the earned-income tax credit will increase for childless households. The maximum credit amount for childless people increases to $1,502, from $543. The age range has also been expanded. People without children will be able to claim the credit beginning at age 19, instead of 25, with the exception of certain full-time students (students between 19 and 24 with at least half a full-time course load are ineligible). The upper age limit, 65, will be eliminated. For single filers, the phaseout percentage is increased to 15.3% and phaseout amounts are increased to $11,610.
Interestingly, to qualify for the EITC, the income limits for married taxpayers are not double those for single taxpayers. For example, the income limit for the 2020 tax year is $41,756 for a single taxpayer with one qualifying child, but only $47,646 for married taxpayers with one qualifying child. ($42,158 and $48,108, respectively for 2021).
Tax Policy Center’s Marriage Calculator can help individuals determine whether marriage penalties or marriage bonuses apply to them.
High Earners With Similar Incomes
Couples who jointly earn between $622,050 and $1,036,800 in the 2020 tax year will pay higher taxes if they marry. This is because the 37% federal tax bracket for married couples filing jointly is not twice as large as the tax bracket for unmarried individuals. Although the 37% federal income tax rate kicks in for income over $518,400 for singles, it kicks in for income over $622,050 for married couples filing jointly. Simply put: A larger portion of a high-earning couple’s income is shoved into the 37% tax bracket if they marry, while more of it stays in the 35% tax bracket if they don’t.
For 2021, couples who jointly earn between $628,300 and $1,047,200 in the tax year will find themselves in a similar situation: paying more taxes if they marry. The 37% federal income tax rate kicks in for income over $523,600 for singles, and it kicks in for income over $628,300 for married couples filing jointly.
High Earners Hit With the Medicare Surtax
The Medicare surtax of 0.9% applies to wages, compensation, and self-employment income over $200,000 for single taxpayers and $250,000 for married taxpayers. A marriage penalty applies to couples whose earnings range from $250,000 to $400,000 because the tax threshold for married taxpayers is not double the threshold for singles.
High Earners Hit With the Net Investment Income Tax
A net investment income tax (NIIT) of 3.8% applies to passive income such as interest, dividends, capital gains, and rental income, after subtracting investment expenses such as interest, brokerage fees, and tax preparation fees.
Like the Medicare surtax, individuals must pay the NIIT if their modified adjusted gross income (MAGI) exceeds $200,000, and they're single—or if it exceeds $250,000, and they're married filing jointly. Here again, a marriage penalty applies to couples whose combined earnings range from $250,000 to $400,000. The difference is that this tax applies to net investment income, not earned income.
High Earners With Long-Term Capital Gains
Long-term capital gains on investments held longer than a year is another area where the 2020 tax year married filing jointly bracket ($496,600) is not double the single bracket ($441,450). Thus, high-earning taxpayers with capital gains will experience a marriage penalty compelling them to pay a higher capital gains tax rate of 20%, rather than 15%, when their combined income is between $496,600 and $882,900.
Similarly, in 2021, the married filing jointly bracket ($501,600) is not double the single bracket ($445,850) for long-term capital gains on investments. So, the same scenario will be true in 2021: high-earning taxpayers with capital gains will experience a marriage penalty compelling them to pay a higher capital gains tax rate of 20%, rather than 15%, when their combined income is between $501,600 and $891,700.
Homeowners With Large Mortgages
Suppose an unmarried couple buys a home in 2020 with a $1,500,000 mortgage attached. In this scenario, each taxpayer may deduct the interest on $750,000 of that mortgage debt. But if a married couple bought the same house, with the same mortgage terms, they may deduct the interest only on $750,000 of the mortgage debt, as a unit.
Furthermore, since the standard deduction for married couples is $24,800, while the standard deduction for singles is $12,400 for the 2020 tax year, there’s a higher barrier for married couples to overcome before a mortgage interest deduction pays off. (For the tax year 2021, the standard deduction for married couples is $25,100, while the standard deduction for singles is $12,550.)
Tax Cuts and Jobs Act's Impact on Marriage Penalties
Tax Bracket Doubling
The Tax Cuts and Jobs Act (TCJA) took effect for the 2018 tax year. The tax law made some changes that lessened the impact of the marriage penalty. For example, the TCJA equalized tax rates for married filing jointly (MFJ) returns with their single counterparts by doubling the income range of the single tax brackets for MFJ. This is true for all tax brackets except the highest, in which MFJ begins at less than double the single range, as explained above in the "high earners with similar incomes" section.
Residents of States and Localities With High Income and Property Taxes
On the other hand, certain provisions in the TCJA have the potential to increase the marriage tax penalty. For example, both single and married taxpayers cannot claim more than $10,000 in itemized deductions for state and local taxes—including income and property taxes. Consequently, single filers who were previously itemizing deductions individually would lose out substantially, after marriage.
States With Marriage Penalties
Marriage penalties aren’t merely a federal concern. According to the Tax Foundation, the following 15 states instituted a marriage penalty as of July 1, 2020, because their income tax brackets for married couples filing jointly are not twice as large as the brackets for single filers:
- New Mexico
- New Jersey
- New York
- North Dakota
- Rhode Island
- South Carolina
Marriage Penalty vs. the Marriage Bonus
Not every married couple suffers penalties. According to the Tax Foundation, spouses who file jointly can enjoy a 20% bonus on their combined marital income if they have children, while they may enjoy a 7% bonus if they are childless. This bonus commonly kicks in when one partner’s income is substantially higher than the other’s.
As a married couple filing jointly, the lower-earning spouse’s income doesn’t push the couple into a higher tax bracket. Rather, the couple benefits from the wider tax bracket applying to married couples. They may pay taxes at a lower rate as a result. Furthermore, the lower-earning spouse may receive contributions to a spousal IRA, courtesy of the higher-earning spouse.
The Bottom Line
Few couples base their marriage decisions on the tax consequences that may result. But realistically, marriage does influence how much each spouse will work after they walk down the aisle. A Congressional Budget Office study from 1997 showed that higher-earning spouses were motivated to work 0.1% to 0.3% more, while lower-earning spouses were motivated to work an average of 7% less than their single days.
There is no denying that marriages can greatly affect tax implications. Couples should be mindful of the changes they may face and plan accordingly.