Prior to 1969, married couples fared well with the tax code. In 1948, the federal government instituted an income-splitting tax code that essentially penalized singles. To rectify this situation, the law was changed in 1969 resulting in what we now know as the “marriage tax penalty”.
Basically, the marriage tax penalty provided a different set of rules for a married couple than it did for two singles. For example, the standard deduction for two singles was greater than what was allowed for a married couple, even though the deduction still provided for two people.
The thinking was that it’s cheaper to run one household with two people than it is to run two separate households and thus, singles needed a bigger credit.
In addition to the standard deduction, married couples were also penalized by “phase-out” levels of income that qualified for deductions.
For example, those who itemize deductions begin to have these deductions reduced once they reach a certain income level. This income “cap” was the same for two married people as it was for one single person, meaning that a single person could enjoy a much larger income and still receive the full benefit of his or her itemized deductions. A married person on the other hand could only enjoy about half that income if he wanted to get full credit for his deductions.
Other credits and deductions were similarly “phased out”, such as the Child Tax Credit and IRA contributions. Essentially, a single person could make more than a married person and still receive the full benefit of allowable credits and deductions.
The marriage tax penalty was recently reduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003. This act equalized the standard deduction (one single person now equals two married people) and increasing the income range for the 15% tax bracket for those filing as married.
This, coupled with the Working Families Tax Relief Act of 2004 essentially eliminated the marriage tax penalty for families in the lower tax brackets through 2010.
In general, it was estimated that married couples paid an average tax of $1,400 more than their single counterparts and this amount grows as the incomes of the couple increases.
Another penalty of concern has to do with social security. Currently, social security deductions take a little over 6% of a worker’s salary. When social security was originally adopted all those years ago, most women didn’t work and, if they did, they received little to nothing for their efforts. As a result, social security allows the wife to receive half of the husband’s benefits once they reach the age of retirement.
For the woman who didn’t work or worked but made very little, this is a nice bonus during those golden years. However, that also means that all the money paid in by a working woman produces no benefit whatsoever, since she can’t have both her benefits and the entitlement from her husband’s work history.
Where will the marriage tax penalty go from here?
Congress is set to vote again on this issue in 2010. Congress could vote to extend the provisions granted by the 2003 and 2004 Tax Acts, continuing the financial relief provided to couples in the 10% and 15% brackets. Currently, couples in the 25% tax bracket still feel the pinch of the penalty and this is unlikely to change.
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