Marriage Penalty Explained
Uncle Sam is a wedding crasher. He likes making the already-expensive post wedding bliss even more stressful. Come April 15, he makes an appearance that many couples weren't expecting; and his hand is out.
In recent years, the federal tax law has actually reduced the marriage penalty, but it still impacts the lives of millions of married couples every year. The penalty was built right into the federal tax tables, meaning that whether a married couple filed jointly or separately they paid a higher tax rate because their combined income put them into a new tax bracket.
When Uncle Sam comes visiting married couples, he boosts the annual taxes for more than 40 percent of them. The marriage penalty hits hardest for couples whose income is pretty much equal; those least affected are the married couples who have one partner that earns substantially more than the other.
And it's not just the combined income thing that makes Uncle Sam do a merry little jig to the tune of "marriage penalty"; married couples are penalized in other ways. When it comes to Roth or Education IRAs, married couples whose combined income hits $160,000 are locked into their traditional IRA. Along the same lines, married couples with more or less equal income can lose out on the Hope education tax credit, which was designed to encourage college saving. Many couples are surprised to find they won't be able to take advantage of tax breaks designed to help, all because they're married.
The source of the penalty goes back to the federal tax tables where the progressive tax-rate structure comes into effect. A higher income means a higher rate of tax. If all married couples followed the "traditional" model of one breadwinner and one stay-at-home spouse, this model would work beautifully. As it is, most married couples today have two incomes, and income averaging makes it more difficult on couples with equal incomes when they have to pay more total tax than they would as two single persons.
Want an easy answer? There really isn't one. The best advice is to use a tax preparer or - even better - tax preparation software that allows you to switch between filing status without redoing all your work. There have been years when filing as "Married, Filing Jointly" actually cost more than "Married, Filing Single". Work with something or someone that allows you to see the difference.