Tying the knot sometimes means paying more taxes. This is where the “marriage penalty” begins
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Some newlyweds receive an undesirable gift from the IRS: a greater tax burden.
While many couples end up paying less tax after tying the knot, some face a “marriage penalty” – that is, they end up paying more tax than if they had stayed unmarried and registered as individual taxpayers .
The penalty occurs if the thresholds, deductions, and credits for tax brackets are not twice the amount allowed for single applicants – and this can affect both high and low income taxpayers, as well as younger or older taxpayers.
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For marriages that were concluded at any point in the last year, you must file your 2020 tax return as a married couple, either together or separately. (However, filing a separate declaration as a married couple usually does not provide any financial benefit.) If you plan to get married this year, you have a year to prepare to file your declaration in 2021.
The deadline for filing your 2020 federal tax this year has been moved to May 17 (state returns may have different deadlines). As of March 26, the IRS has issued 56.5 million refunds averaging $ 2,902 each.
Here’s What You Should Know About Marriage Tax.
For couples with higher incomes
A higher tax burden for higher earners can come from a variety of sources.
The 2020 yield is subject to the highest federal tax rate of 37% for taxable income of $ 518,400 for single applicants. However, for married couples filing together, this rate applies to income of $ 622,050 and above.
“Tax brackets are doubled for most taxpayers, but there is still a penalty for the highest tax rate,” said Garrett Watson, senior policy analyst at the Tax Foundation.
2020 income tax brackets
To illustrate, two people with an income of $ 500,000 each would fall into the tax bracket with the second highest tax rate of 35% if they filed as a single taxpayer.
However, as a married couple with a combined income of $ 1 million, they would pay 37% to $ 377,950 of that (the difference between their income and the $ 622,050 threshold for the highest rate). That would mean paying about $ 7,760 more in income tax for 2020.
There are other provisions of the tax code that may affect higher earners more severely when they get married. For example, while a person can have wages of up to $ 200,000 before the Medicare surcharge of 0.9% begins, the limit for married couples is $ 250,000.
Likewise, the income threshold for capital gains tax of 3.8% will not be doubled. Singles with modified gross adjusted income greater than $ 200,000 pay the tax, while married couples filing it together pay it if their income exceeds $ 250,000. (The tax applies to things like interest, dividends, capital gains, and rental or royalty income.)
In addition, the limit on state and local tax deduction – also known as SALT – is not doubled for married couples. The $ 10,000 limit applies to both single applicants and married applicants. (Couples filing separately will each receive $ 5,000 for deduction). However, the deduction is only available to taxpayers who do a breakdown.
For low wage earners
For those on lower incomes, the earned income tax credit may result in a marriage penalty.
The credit is available to working taxpayers with children provided they meet income limits and other requirements. Some low-wage earners without children are also eligible.
Because it is refundable – meaning it can be refundable even if your tax burden is zero – it is considered valuable to working parents on low or modest incomes.
However, the income limits associated with the tax break are not doubled for married couples (see table below for the 2020 parameters). And while recent legislation has expanded credit for 2021 – mostly for workers without children – it still won’t double the income limits from single applicants to married couples filing together.
Fifteen states also have a marriage penalty for taxpayers built into their marginal tax brackets, although this is more evident in some places than in others. For example, in 2020 Maryland’s maximum rate of 5.75% applies to incomes over $ 250,000 for single applicants and over $ 300,000 for married couples.
In some states, according to the tax foundation, married couples are allowed to file the same tax return separately so as not to face a penalty and loss of credit or exemptions.
Social security income
If you are retired and already on Social Security, be aware that getting married can have additional tax implications.
For single applicants, if the total of your Adjusted Gross Income, non-taxable interest, and half of your Social Security benefits is less than $ 25,000, you owe no tax on those benefits. However, for married couples filing a joint return, the threshold is $ 32,000 instead of double the amount for individuals.
Additionally, if you or your new spouse are contributing to traditional or individual Roth retirement accounts, be careful about how much you are investing in these IRAs. There are limits to deductions and contributions, and the income of both spouses feeds the equation.
The Tax Policy Center has a marriage calculator that you can use to enter details of your partner’s and partner’s financial lives – wages, business income, dependent children, etc. – to see how your taxes are performing on filing as a married couple.