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 penalties. In fact, some lucky ones may even enjoy 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.
- Middle-income married earners are more likely to remain unaffected by tax implications.
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 a 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 $6,431, depending on filing status and the number of children that 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. Interestingly, to qualify for the EITC, the income limits for married taxpayers are not double those for single taxpayers. For example, the limit is $40,320 for a single taxpayer with one qualifying child, but only $46,010 for married taxpayers with one qualifying child.
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 $612,350 and $1,020,600 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 $510,300 for singles, it kicks in for income over $612,350 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.
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 married filing jointly bracket ($488,850) is not double the single bracket ($434,550). Thus, high-earning taxpayers with capital gains will experience a marriage penalty compelling them to pay a capital gains tax rate of 20% when their income exceeds $488,850, rather than the typical 15% capital gains tax.
Homeowners with Large Mortgages
Suppose an unmarried couple buys a home 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 on $750,000 of the mortgage debt, as a unit. Furthermore, since the standard deduction for married couples is $24,000, while the standard deduction for singles is $12,000, there’s a higher barrier for married couples to overcome before deducting mortgage interest pays off.
Residents of States and Localities with High Income and Property Taxes
Since the Tax Cuts and Jobs Act took effect for the 2018 tax year, 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, singletons who were previously itemizing deductions individually would lose out substantially, after marriage.
It's Not Just a Federal Penalty
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, 2018, 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
The Marriage Bonus
Not every married couple suffers penalties. According to the Tax Foundation, spouses who file jointly can enjoy a 21% bonus on their combined marital income if they have children, while they may enjoy an 8% 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 shows that higher-earning spouses are motivated to work 0.1% to 0.3% more, while lower-earning spouses are motivated to work an average of 7% less. There is no denying that marriages can greatly affect tax implications. Couples should be mindful of the changes they may face and plan accordingly.