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.
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Let’s look at things that could be considered “hidden” marriage penalties. So far, we’ve examined the marriage penalty through the lens of the tax brackets. But there are other places where the marriage penalty can bite people. Consider:
- Two single people who live together can each take a $2,500 deduction for student loan interest. A married couple filing jointly is limited to deducting $2,500 total, and a married couple filing separately cannot take this deduction at all.
- Two single people who live together and who have kids can divide the kids up between them in such a way as to maximize head of household filing status, the earned income credit and child tax credit (assuming that each person is a legal parent of the children). A married couple filing jointly, with children, might still qualify for the EIC, but they’d have to use their combined incomes in calculating the EIC. And a married couple filing separately cannot take the EIC at all.
- Two single people can each claim itemized deductions, or the standard deduction, or a mix of both in whatever way maximizes their deductions. A married couple filing separate returns must either: both take the standard deduction or both take itemized deductions.
- Two single people who own a house together can deduct mortgage interest up to the applicable cap for the year (in other words, the cap times 2) while a married couple is limited to just the applicable cap.
Example:
Alex and Angie are single but they have two children together. Alex’s AGI is $50,000 and Angie’s is $20,000. Since they’re both the parents of the children, they can decide between themselves who claims the children, and they can do so in a way that maximizes the tax benefits associated with having children. For example, Alex could claim both kids, head of household filing status, and all of the family’s itemized deductions. Angie would file as single and take the standard deduction.
Alternatively, Angie could claim both kids and maximize the earned income credit and take the standard deduction, while Alex could file as single but claim all the itemized deductions.
A third alternative would be for Angie and Alex to each claim 1 child. Angie would get the EIC and claim the standard deduction; Alex would claim 1 child and use head of household filing status and claim all the itemized deductions.
If they were married, their income would be too high to claim the EIC, and they’d be limited to taking either the standard deduction or itemized deductions.
This isn’t to say there aren’t tax benefits to being married. Let’s use employer-provided health insurance as an example.
When a spouse works for an employer that provides health insurance, that spouse can put the other spouse on the insurance policy with no issues. But if a couple is not married, they probably couldn’t put their partner on the policy, or if they did, they might be taxed on the value of the benefits provided to the partner*.
(*-AUTHOR’S NOTE: if a partner qualifies as a “medical dependent,” then the benefits wouldn’t be taxable. A further discussion of this topic is beyond the scope of this article, but I wrote about it in more detail in this post.)
Another area where married couples have an advantage is with estate tax issues. There are, of course, legal benefits to being married as well.
Conclusion
As you can see, the taxation of married couples has had a long and strange history in our tax code. Most of that history involves lawmakers trying to fix one inequality and in doing so they inadvertently create another inequality.
There will be one final part to this series, which will pull everything together and will include links to the other parts.