Back in 2014 and into 2015, I posted a multi-part series of posts about the history of marriage in the tax code. In 2016 I was asked to condense that series into a CPE presentation. Here are excerpts from that presentation. This series of posts will cover a lot of the same ground as was covered three years ago, but hopefully with a little bit fresher perspective.
Because these parts are being posted haphazardly over the course of many months, I will pull all parts together once the final part is posted, and provide links to all the parts in one place.
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 increase John and Jane’s income to the equivalent of more than $120,000 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, as shown in the charts in Part 10.
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.
By the mid-1990s, the lower range of where the marriage penalty kicked in was creeping downward.
In 1988, the marriage penalty became a reality at around $120,000 (in modern-day dollars). By 1995, the marriage penalty would apply at about $75,000 (in modern-day dollars).
In 1995, John has taxable income of $35,000 and Jane has taxable income of $20,000. Their total taxable income is $55,000, and the tax on that would be $10,330.
If John and Jane were single, John’s tax liability would be $6,765. Jane’s tax liability is $3,000, for a total tax liability of $9,765.
The marriage penalty here is $565 (the equivalent of about $850 today).
Tax reform in 2002 would give us the current tax brackets we have now, where the marriage penalty kicks in at higher income levels. In fact, one can run scenarios where a married couple has income well in excess of $100,000 and is still not subject to the marriage penalty.
This is a little misleading though. One thing not taken into account in these examples about the marriage penalty is the ability for unmarried couples to play with itemized deductions and swapping kids around in order to maximize tax benefits.
More on that in the next part.