There are a lot of positive things about getting married, but the IRS’ “marriage penalty” isn’t one of them. The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. This “penalty” pops up in a variety of places in the federal tax code. Thankfully, legislation in recent years is shrinking the problem, but there are areas where it still exists.
There’s a reason we point this out: good tax planning can make a big difference in your financial life. If you’re not sure of the filing status you should be using, a tax professional can help.
Taxable Social Security benefits: One of the worst examples of the marriage penalty is imposed on older couples. For single-filers, income taxes on Social Security retirement benefits start when income exceeds $25,000. Perhaps you would expect that the married threshold would be $50,000, but it is not. Married-filing-joint couples begin paying income taxes on Social Security benefits when their taxable income exceeds $32,000. You can learn more about the taxation of Social Security benefits on the administration’s website.
Accelerating phase-outs: The tax code is filled with various income phaseouts for benefits, credits, and deductions. Thankfully, most now have the marriage penalty alleviated, but it still exists in the Adoption Credit and Roth IRA contribution limits. A meaningful example exists in the way that taxpayers qualify for the earned income tax credit(EITC). A single parent of three in 2021 can qualify for the EITC with income less than $51,464, while a married couple loses the EITC with combined income over $57,414.
Surtaxes above certain thresholds: Taxpayers face an additional 0.90% wage surtax and 3.80% tax on investment income tax above the following thresholds: $200,000 for single filers and $250,000 for married couples filing jointly.
Itemizing deductions can favor single taxpayers: The tax code limits the claiming of itemed deductions to $10,000, including property taxes and sales taxes. The limit is the same regardless of whether the return is for a single-filer or a joint-filer.
Some of the “marriage penalties” are getting better, but there are still occasions where married returns enjoy less favorable treatment than single returns. If we can help make sure you’re filing in the most advantageous way, let us know!
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.