wedding-rings-150300_1280This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code.

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years, literally, to finish, so I can’t guarantee when the next post on this topic will appear.

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At the end of Part 4 of this series, I mentioned that I would give some examples for why most married couples continued to file combined tax returns even with the major rate increases of 1917.

As detailed in Part 4, the workforce in those days was predominantly male. Married women typically didn’t work outside the home and so they didn’t have income of their own to report. These couples, by default, filed “joint” or combined tax returns.

Additionally, there were no filing statuses in those days, and just one tax bracket. In cases where both couples had income, it made sense to just file a combined tax return because there was no savings involved with filing separately.

Example 1:

In 1920, John has gross income of $5,000; Jane has gross income of $1,000. Subtracting out the $2,000 exemption amount leaves them with 4,000 of taxable income, which puts them in the 4% range of the tax bracket. They would still be in the 4% range if they filed separate returns. There is no benefit to filing separate returns, so for the sake of convenience they would likely file a combined return.

Note that $5,000 in 1920 is the equivalent of about $57,000 today; $$1,000 is the equivalent of about $10,000 today.

Example 2:

In 1920, John has gross income of $10,000; Jane has gross income of $2,000. If they file a joint return, their taxable income is $10,000. The tax on $10,000 is $750.

Or, they could file separate returns. John would likely claim the full $2,000 exemption amount himself, knocking his taxable income down to $8,000. The tax on $8,000 is $530. Jane’s taxable income would be $2,000, which creates a tax of $80. The total tax owed filing separately is thus $610 ($530 + $80), a savings of $140.

John and Jane would most likely file separate returns.

Note that $10,000 is the equivalent of about $114,,000 today, and $2,000 is the equivalent of about $23,000 today.

As these examples illustrate, filing a separate return was only advantageous if both spouses had income and their combined taxable income pushed them enough above the surtax level to make it worthwhile to file separately.

The tax changes made between 1917 and 1919 did not affect the way most married couples filed tax returns at the time, but the changes planted the seeds for the current system of filing statuses that we still use today. All because some high-income taxpayers discovered that they could have large tax savings by filing separate returns – even if only one spouse had income.

Those couples were fortunate to live in a “community property” state. And that is where the next part of our filing status story will continue.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”