One of the most disappointing things about the government is their institution of the marriage penalty tax. The government is smart to laud the act of marriage in order to collect more taxes. When you’re in love, what’s an extra $1,000 or $10,000 a year in taxes you’ve got to pay? Love is blind and the government tries to take full advantage of you.
Lucky for us, we are not blind. We don’t mindlessly follow everything our politicians have to say. We question why the government suddenly allowed Roth IRA conversions during the height of the financial crisis. We think for ourselves, and that’s why the lot of us are going to be much better off than the rest.
This post will present examples of various fictitious couples with various income levels and deductions to give you an idea of how much extra you must pay the government in order to get married. All data comes from this marriage penalty tax calculator by the Tax Policy Center.
I encourage you to input your own numbers and see what happens after this post as well. Remember, please take your anger out on the government, not on me. I’m just the investigator trying to shine a bright light on this ludicrous situation. Just the fact that I had to spend loads of time figuring out various income permutations to see when the marriage penalty tax kicks in is maddening.
Marriage Penalty Tax Example #1A
Each person makes $50,000, no children, no mortgage, no penalty. Hooray!
Marriage Penalty Tax Example #1B
Same example of $50,000 income each, mortgage, but with two children. It shows a marriage penalty, but the overall tax amount is lower due to child tax credits. From $11,638 to $7,863. So far so good. There is hope for humanity, but the government is saying you should have children as singles instead.
Marriage Penalty Tax Example #2
One person makes $100,000 and has a mortgage, another person earns $50,000. They have no children but it doesn’t matter even if they did because they are past the $110,000 combined income threshold to receive full child tax credits. A $1,050 marriage penalty is created with their union. Not egregious, but not ideal.
Marriage Penalty Tax Example #3
Each person makes $200,000. They don’t own a home, and have two children. The results are the same if they have no children. A whopping $15,162 marriage penalty tax is created for these two high income earners.
Marriage Penalty Tax Example #4
Each person makes $200,000, but this time they have $45,000 in deductions from a mortgage and property taxes. They have two children under the age of 17. The deductions drop their total tax bill down to $92,089 from $104,987 in the previous example, but if they weren’t married, their combined taxes would only be $76,825 (17% lower).
Marriage Penalty Tax Example #5
One person makes $500,000, the other person makes $80,000. They own a home with a mortgage and have one child. Lucky for the person making $80,000 to marry the person making $500,000. Not so lucky financially for the $500,000 income earner. After 20 years, this person will have paid $270,000 more in taxes than if he had stayed single or not married with the added $13,434 in taxes a year.
Marriage Penalty Tax Example #6
Two people make $85,000 each and have no kids and no mortgage. It looks like $170,000 in total income is where the marriage income tax starts to kick in.
Marriage Tax Credit Example #7
One person makes $60,000, the other person makes $40,000. There is no mortgage and zero kids. We have a winner! Because the combined income is under $110,000, the couple can decide to have a kid and claim $1,000 per child to lower their taxes even further to $10,638 from $11,638.
Marriage Tax Credit Example #8
One person makes $50,000 and marries someone making nothing. They do not have a mortgage or kids. If they were to have kids, their $3,548 tax liability would decline by $1,000 per kid. If they decide to have three kids, not only will they not have to pay any taxes, they’ll “earn” about $700 bucks from the government every year. This is a fantastic income combination.
Marriage Tax Credit Example #9
Here is the beautiful scenario where one person makes $200,000 and one person makes $0. They have a couple kids (doesn’t matter), mortgage interest of $18,000, pay state taxes of $12,000, and charitable contributions of $1,000. Why HELLO $7,330 tax credit!
Marriage Tax Credit Example #10
Here is the real home-dinger. One person makes $300,000 and marries another who makes $0. They pay $35,000 in State taxes, $25,000 in mortgage interest, $2,000 in charity and have a child. The $300,000 a year earner saves $11,162 a year in taxes. I tried higher than $300,000 a year and the marriage tax credit starts to decline.
THE IDEAL INCOME TO AVOID THE MARRIAGE PENALTY TAX
Based on my analysis, the ideal income variations to avoid paying the marriage penalty tax are:
1) Have a total income (MAGI) below $110,000 to be able to claim $1,000 per child tax credit. You still get some child credit after $110,000, but there is a drastic phaseout. Depending on deduction levels, owning a home with a mortgage will reduce your tax bill further. It seems that a total income level hovering around $100,000 enables couples not to pay a marriage penalty tax and potentially even get a marriage tax credit.
2) One person with a MAGI $300,000 or below marries someone with $0 income. Example #8 ($50,000 + $0) is a common example that helps many middle class Americans. Example #8 shows how you can pay no taxes and actually earn money with kids. Example #9 ($200,000 + $0) and #10 ($300,000 + $0) are also a fantastic scenario that can help those living in high cost areas. After $300,000, the marriage tax credit starts to decline.
3) Don’t have a combined income of more than $170,000 (Example 7 with $26 penalty) if two people are working, although at $150,000 total income (Example #2 has a $1,050 penalty)! Baffling. Best to just keep total income below $110,000 or have one spouse not work with total income at $300,000 or below.
The worst scenarios are when you have one high income earner marrying a low income earner or two high income earners getting married. The reason is because 1 + 1 = 1.25 or less e.g. $406,750 + $406,750 = $457,600 for the 39.6% marginal tax bracket for example. The government assumes one person in the marriage will downshift or quit their jobs. How sexist is that?
Meanwhile, in the case of a low income earner marrying a high income earner, the low income earner’s income will just get taxed at the highest marginal tax rate. For example, say you make $30,000 and marry someone making $800,000. Your $30,000 is no longer taxed at the 15% rate because it is added on to your partner’s $800,000 income to be taxed at the 39.6% rate.
STILL WANT TO GET MARRIED?
I’ve always thought the concept of marriage was a little outdated. As you can see from the examples above, it seems absurd to have to pay the government more taxes just for the opportunity of getting married. Social pressure seems like the only reason to get married nowadays. But it’s now common for a couple to have children and not be married.
The only financial reason to get married is to prevent the government from stealing from you if you die before you start collecting Social Security. Isn’t it absurd that if you die early, your Social Security benefits go back to the government and not to a designated family member? By legally marrying someone, your surviving spouse gets to at least collect your Social Security benefits when the time comes for distribution.
Yes, there is something to be said for following tradition and being a romantic. I’m sure some reading this will think, “Gawd, love is not just about money you know!”, which is true. But why do we have to pay the government to be in love? Why can’t we all be treated equally? Why is divorce the #1 killer of wealth? I wrote this post to allow people to leap into love with their eyes wide open.
Finally, if you think filing separately will help lower the tax bill, don’t be naive. The government is smarter than us all.
Recommendation: Track your finances together with Personal Capital, the best free financial tool available for couples. You can track your net worth, stay on top of your cash flow, analyze your investments for proper risk, find out if you are paying excessive fees, and better plan for retirement with their retirement planning calculator. When the government is beating you up with the marriage penalty tax, it’s more important than ever to stay on top of your finances!
Updated for 2017 and beyond