Marriage in the Tax Code, Part 14: The Marriage Penalty Gets Worse Through the 1970s

wedding-rings-150300_1280In future parts of this series, I’ll examine the social and legal landscape that may have led to the marriage penalty. But first I want to give some more examples.

By the early 1980s, the marriage penalty started affecting couples at lower income ranges.

Example

In 1982, John has taxable income of $14,000 and Jane has taxable income of $6,000, for combined taxable income on their married filing jointly tax return of $20,000. The tax on $20,000 is $2,773.

If John and Jane were single, John’s tax would be $2,100. Jane’s tax would be $528. Total tax owed between the two of them is $2,628.

Marriage would cost John and Jane would pay an additional $145 in taxes.

For context, $1 in 1982 is equal to approximately $2.38 today. So $14,000 is the equivalent of $33,300 today; $6,000 is the equivalent of $14,300 today; and $145 is the equivalent of $345 today.

In other words, John and Jane face a marriage penalty when their combined income is just $47,000.

Now let’s fast forward to 1988, when new tax brackets took effect after the tax reforms of 1986.

In 1988, John has taxable income of $25,000 and Jane has taxable income of $8,500, for combined taxable income of $33,500. Their total tax liability is $5,513.

If John and Jane were single, John’s tax liability would be $4,680, Jane’s tax liability would be $1,275, for a total tax liability of $5,955. There is no marriage penalty at their income level. For reference, $33,500 of income is equal to $65,000 today. The tax reform of 1986 eliminated the marriage penalty at the lower income levels.

The marriage penalty did still exist, but only at higher income levels. In running projections, I had to up John and Jane’s income to the equivalent of $116,000 in today’s dollars before the marriage penalty applied.

One thing that helped ease the marriage penalty was the fact that the tax brackets were simple in 1988. Here’s what the bracket looked like:

Married Filing Jointly Single
Marginal Tax Brackets Marginal Tax Brackets
Tax Rate Over But Not Over Tax Rate Over But Not Over
15.0% $0 $29,750 15.0% $0 $17,850
28.0% $29,750 28.0% $17,850

But as the years passed, more levels were added back to the tax brackets, and the marriage penalty made a comeback at lower income levels.

Marriage in the Tax Code, Part 13: Examples of the Marriage Penalty in the Early 1970s

wedding-rings-150300_1280Here are some examples of the marriage penalty that came about in 1971.

Us tax pros generally say the marriage penalty doesn’t apply at the lower ends of the tax brackets. That’s generally true now, and it was generally true in 1971. A typical middle class couple would not face the marriage penalty.

Example

In 1971, John and Jane are unmarried. John has taxable income of $8,000. Jane has taxable income of $1,000. John’s tax liability will be $1,590. Jane’s will be $145. Combined, that equals $1,735.

Now let’s say John and Jane are married. The tax on a joint tax return showing $9,000 of taxable income is $1,600. There is no marriage penalty at their income level.

($1 in 1971 is equal to $5.67 today. So $9,000 of income is approximately $51,000 today.)

Then as now, the marriage penalty applied mainly to cases where a couple both had taxable income.

Example:

In 1971, John and Jane have taxable income of $8,000 each (equal to about $45,000 each today) for total taxable income of $16,000 on their joint tax return. The tax on $16,000 for a married couple is $3,260.

If they were unmarried and filing as two single people, they would owe $1,590 of taxes each, or $3,180 of total taxes. That’s a marriage penalty of $80, or about $450 in today’s dollars.

Through the years, the marriage penalty would get worse, as we’ll explore in Part 14.

Marriage in the Tax Code, Part 12: Meet the Marriage Penalty

wedding-rings-150300_1280Of all the tax myths that exist, the one I encounter most is: married couples always save money on their taxes.

But since 1971, this has not been true.

As I’ve detailed in prior parts of this series, tax law regarding marriage has changed through the years. In the beginning, there were no filing statuses and only one tax bracket. Marriage conferred no benefits but also no penalties.

Married couples in community property states soon discovered that they could save money by employing community property laws to split income. This created an inequality between married couples in community property states and married couples in common-law states.

To fix this inequality, Congress created filing statuses with unique tax brackets in 1948. But in fixing this inequality, a new inequality was created, this time between married couples and unmarried couples.

Congress made fixes in 1969 (which took effect in 1971) to try and fix this inequality. Instead, the tax brackets created the “marriage penalty,” which historically has affected 50% of married couples.

Stated simply, the marriage penalty is when two people are better off filing as two single (unmarried) people rather than filing as a married couple.

In future parts, we’ll look at examples of the marriage penalty since 1971 and examine more closely the social and legal landscape that led to the marriage penalty phenomenon.

Tax Implications of Friday’s Ruling on Same-Sex Marriage

Image courtesy of user Nemo on Pixabay.com
Image courtesy of user Nemo on Pixabay.com

The U.S. Supreme Court on Friday ruled that same-gender marriage was legal in all 50 states.

From a tax standpoint, this should — theoretically — make tax filings much easier for anyone in a same-gender marriage. Marriage is now marriage, and all married couples will file all tax returns as married.

But as tax blogger Kay Bell at the bankrate.com blog points out:

Although today’s ruling is momentous, there will be some wedding delays in states where same-sex marriage was banned.

Technically, the Supreme Court’s decision only applies to the four states where the cases before the court originated, Adam Romero, senior counsel at UCLA’s Williams Institute, told NPR. That’s Ohio, Kentucky, Tennessee and Michigan.

Further court action is necessary for the Supreme Court ruling to apply to the other states with bans, but most same-sex marriage advocates expect the judicial system to move relatively quickly.

This ruling should not have an impact on federal tax returns because couples in same-gender marriages have been able to file as married on their federal tax returns since 2013. This ruling affects state tax returns in states that had bans against same-gender marriage.

Couples affected by this should review prior-year state filings, as they may be able to file amended tax returns.

I would recommend waiting a bit to file those amendments, though, to see 1) what kind of guidance is released by state revenue agencies in the affected states, and 2) what happens in the 9 states where further court action might be necessary.

 

 

Marriage in the Tax Code, Part 11: Meet the “Single Penalty”

wedding-rings-150300_1280The 1948 tax reform fixed one inequality but created a new inequality – this time between single taxpayers and married taxpayers.

Example:

In 1949, John and Jane are married and have combined taxable income of $3,000 (approximately $29,000 today). Their total tax owed is $600.

Jack is a single taxpayer with taxable income of $3,000. His total tax owed is $620. Jack pays $20 more in taxes (approximately $192 today) even though he has the same amount of income as John and Jane.

As income levels increased, the disparity became more pronounced.

Example:

In 1949, John and Jane are married and have combined taxable income of $10,500 (approximately $101,000 today). Their tax liability is $2,330.

Jack is a single taxpayer with taxable income of $9,500. His tax liability is $2,470. Jack owes $140 more in taxes than John and Jane (approximately $1,350 today) even though his income is $1,000 less than theirs.

Single taxpayers complained about this inequality. In 1951, Congress created another filing status, called “head of household.” The filing status was (and still is) intended for single taxpayers who are raising children.

A new tax bracket was created for head of household filing status, with rates that were halfway between what a single person would pay and what a married couple would pay on a joint return.

More changes came in 1969 when Congress revised the tax brackets to further equalize the tax treatment of married people and single people. The changes took effect in 1971.

And again, in fixing one set of inequalities, the problem was over-corrected and a new set of inequalities was created – the “marriage penalty.”