The Tax Cuts and Jobs Act of 2017 removed the “marriage penalty” for many couples. But many others still face a bigger tax bite because they are married.
Historically, married couples often had to pay higher income taxes than the same two people would have faced if they remained single. Their combined income pushed them into higher tax brackets.
Example: Under the old tax law, two singles who each had taxable income of $90,000 would have been in the 25% bracket. If they wed, their combined $180,000 income would have put them in the 28% bracket.
The 2017 tax law reshaped the tax brackets with an eye toward eliminating the marriage penalty—but like past attempts, the new law failed to truly level the playing field for married taxpayers. That’s because the marriage penalty is not only a result of tax brackets—it stems from a wide range of details hidden in our complex tax code, many of which remain.
Here are various ways in which married people still might have to pay extra at tax time. It’s worth knowing these tax traps if you’re married or considering marrying or remarrying.
Don’t assume that tying the knot is a financial mistake, however. Besides reduced living expenses, marriage can have financial benefits in terms of receiving Social Security benefits, pension benefits and more. And some couples will see their taxes fall, not rise, especially when one spouse earns all or most of the money. Ask your tax preparer about whether these traps should affect your financial decisions, including whether it makes sense for both spouses to work full time. Also, see the Bottom Line Personal articles on strategies to deal with the new tax law in the February 1, 2018 issue (BottomLineInc.com/money/tax-planning/5-strategies-save-money-new-tax-law) and how to reduce the tax shock in the July 15, 2019 issue (BottomLineInc.com/money/bonds/how-to-invest-in-munis-to-lower-taxes).
How Married People Are Affected
Key tax advantage from investment losses is cut in half. If you’re single, the tax code allows you to deduct up to $3,000 in capital losses against your ordinary income. That can be a significant tax savings—with the above example, offsetting $3,000 of income that would have been taxed at the 24% tax rate could reduce a tax bill by more than $700. If you’re married, the tax code allows you and your spouse together to deduct up to the same $3,000. That means getting married cuts the amount of capital losses two people can deduct against ordinary income in half.
Social Security benefits still are more likely to be taxed. If you’re single, you can have a “modified adjusted gross income” (MAGI) below $25,000 each year without any of your benefits facing federal income taxes. (Up to half of your benefits are taxed if your MAGI is between $25,000 and $34,000…or up to 85% if it’s above $34,000.) Those income thresholds increase if you’re married—but not by much. For married people, up to half of Social Security benefits are taxed over $32,000…and up to 85% are taxed over $44,000—much less than two unmarried people could together earn without facing these taxes.
Example: You, your unmarried brother and your spouse each have a MAGI of $24,000, and all of you are receiving Social Security benefits. You and your spouse will have to pay federal income taxes on most of your benefits, while your brother won’t owe any federal income taxes on his—even though each of you had exactly the same income.
It is tougher to deduct state and local taxes. For those who itemize their taxes, there now is a $10,000 cap on the amount of state and local taxes that can be deducted on the federal tax form. The same $10,000 cap applies whether you are single or married. Yet two single people filing separately can deduct up to $20,000 between them.
They are less likely to qualify for the earned income tax credit. This credit is intended to help low-income earners, especially low earners who have dependent children. It can be significant—as much as $6,557 in 2019. But here, too, the eligibility thresholds are set in a way that often puts married taxpayers at a severe disadvantage. Example: A married couple with three or more qualifying children cannot claim this credit if their earned income exceeds $55,952. (Lower cutoffs apply with zero, one or two children.) For a single person with three or more kids, the credit doesn’t phase out until $50,162—which means a couple that is not married could earn more than $100,000 between them and still both qualify.
They are more likely to get caught by the alternative minimum tax (AMT) than if they were single. This complicated section of the tax code is intended to prevent higher-income people from using tax shelters and other loopholes to avoid income taxes. The new tax law greatly reduced the number of taxpayers who will have to pay the AMT, but it’s still tougher on married taxpayers than single ones. The AMT exemption—the amount you can earn before this tax comes into play—is $111,700 for married couples in 2019 versus $71,700 for singles. A pair of unmarried people could potentially earn $143,400 between them before AMT taxes become an issue, as long as their income was divided evenly between them.
Extra Tax Hits for High Earners
There are additional tax traps that affect only couples who have household incomes of close to $200,000 or higher…
They are more likely to face Medicare and net investment income surtaxes. High earners face an “additional Medicare tax” of 0.9%…plus an added 3.8% tax on certain investment income. If you’re single, these taxes apply if you have a MAGI over $200,000. If you’re married, they apply over $250,000, which puts couples who both earn big bucks at a big disadvantage. Example: Two people each have $150,000 in earned income and $40,000 in net investment income. If they are single, neither owes either of these taxes. But if the couple is married, they have $300,000 in wages and $80,000 in investment income, so they’re over the $250,000 threshold by $50,000. And on that $50,000, they pay the 0.9% Medicare tax. And since they’re over the $250,000 limit, in this example they will owe 3.8% on the $80,000 investment income. All that translates to $3,490 in additional taxes.
They are less likely to qualify for adoption tax credits. There’s a generous tax credit available to help people adopt children—up to $14,080 per child in 2019 to offset costs including adoption fees, attorney fees and travel costs. This credit starts to phase out for single taxpayers whose MAGI is greater than $211,160, and it’s completely unavailable above $251,160. For married taxpayers, those thresholds are…exactly the same. That means two single taxpayers can qualify for the full credit even if they each earn $210,000…but a married couple wouldn’t qualify for any of it if they each earn $130,000.
They might miss out on tax-advantaged IRA contributions. If you’re married, your right to make a Roth IRA contribution starts to phase out when your MAGI reaches $193,000 and disappears entirely at $203,000. If you’re single, those figures are $122,000 and $137,000. Example: You and your romantic partner each earn $110,000, and you both qualify for the full Roth IRA contribution. If you wed, neither of you would qualify for any Roth IRA contribution.
Tax deductibility for traditional IRA contributions also are somewhat skewed against married couples who have similar incomes. If you’re married and you and/or your spouse are active participants in an employer’s pension plan, the deductibility of your traditional IRA contributions starts to phase out at $103,000 and disappears entirely at $123,000. For single people, these figures are $64,000 and $74,000.
High earners still can be trapped by marriage-punishing tax brackets. The new tax law did not do away with the marriage penalty for the top 37% tax bracket. This 37% rate applies to 2019 earnings above $510,300 if you’re single…or above $612,350 if you’re married. Example: You and your romantic partner each have income of $499,000—none of your earnings faces the top tax rate. If the two of you tie the knot, $385,650 of your combined earnings would face that 37% rate rather than the 35% rate if the two of you remained single. The difference represents a potential extra tax hit of more than $7,700.