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3 New Ways Getting Married Can Raise Your Taxes

One peculiar aspect of American tax law is that getting married can dramatically affect a couple's total tax bill. Many couples, especially those in which one person earns the vast majority of the couple's income, benefit from the tax treatment on married couples. But many others, especially two-income families where each spouse's earnings are roughly equivalent, can end up paying a whole lot more in tax -- a phenomenon known as the marriage penalty.

The tax compromise that lawmakers agreed to at the beginning of 2013 made several substantial changes to the tax laws, and a few of those changes actually made the marriage penalty worse for some couples, especially high-income couples where both spouses work and have considerable income. Let's look at these three provisions and how much they'll boost the marriage penalty's impact in 2013 and beyond.

1. The new Obamacare tax.
Obamacare created two new taxes: a 0.9% tax on wages and other earned income for high-income earners, and a 3.8% tax on investment income. For both taxes, the threshold is $200,000 for single filers and $250,000 for married couples.

So if two single people each earned $200,000, they wouldn't be subject to the Obamacare tax at all. But if they got married, then $150,000 of their total income of $400,000 would get taxed, with an additional tax liability of $1,350. Similar situations with investment income could lead to a much larger marriage penalty, as the investment tax rate is more than quadruple the rate for wages. Investors in dividend-oriented ETFs Vanguard High Dividend Yield (NYSEMKT: VYM  ) , SPDR S&P Dividend (NYSEMKT: SDY  ) , and iShares DJ Select Dividend (NYSEMKT: DVY  ) should therefore take care to consider tax-favored investment vehicles for their investments.

2. New high-income tax brackets.
The marriage penalty has existed in tax brackets for a long time. The bottom two tax brackets don't include a marriage penalty, as they're designed so that the amount of income married couples can earn is exactly twice what singles can earn to stay within a given bracket. But for the 25% tax brackets and above, the married brackets kick in at far less than twice the single amounts, with the 35% bracket kicking in at exactly the same amount for singles and couples.

The tax compromise created a new 39.6% bracket that kicks in for high-income taxpayers. The way the law was drafted, that 39.6% rate applies to single filers making more than $400,000 and joint filers with income above $450,000. What that means is that if two unmarried people each make $400,000, they won't be subject to the new provision, with taxes topping out at 35%. But if those two people get married, then an additional $350,000 in income will get taxed at the higher rate. In this example, a couple would pay more than $16,000 in additional taxes solely because of the marriage penalty in the tax brackets.

Similar provisions affect capital gains tax rates, with a higher 20% maximum rate applying above the income threshold compared with 15% below it. With the S&P 500 (SNPINDEX: ^GSPC  ) having set record highs during the past week, capital gains could be substantial for those selling off or rebalancing holdings in their portfolios.

3. Reductions in itemized deductions and personal exemptions.
The tax compromise brings back provisions that reduce the amount that high-income taxpayers can deduct for personal exemption allowances and on itemized deductions. Again, the thresholds at which these provisions kick in include a marriage penalty, with singles above $250,000 of adjusted gross income and couples over $300,000 not being able to reduce their taxable income by the full amount of their exemptions and deductions.

Here, the impact of the marriage penalty could mean that every penny of personal exemptions is taken away, even if none of them would be removed if the couple remained unmarried. Similarly, reductions in itemized deductions could increase their tax bill by more than $2,375 at top rates.

Why a marriage penalty?
The policy reason put forth for allowing a marriage penalty tends to be that couples can live more cheaply than singles. But with no rules preventing unmarried taxpayers from living together and reaping the same living-cost savings, it'll be interesting to see how many couples choose not to tie the knot in order to save on their tax bills going forward.

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Read/Post Comments (6) | Recommend This Article (6)

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  • Report this Comment On April 13, 2013, at 11:21 AM, sorelife wrote:

    shouldn't this be reason enough to allow gays to marry? they'd be taxed TO DEATH just like me and my husband. i have no objections at all.

    who knows...maybe people will just simply live together.had i known how much it would have costed us in taxes, we would have just continued living together like we did for 10 YEARS before we married.

  • Report this Comment On April 13, 2013, at 4:41 PM, garyegray wrote:

    Ever since the Federal Reserve was created by an act of Congress in 1913, inflation is used to strip most of the wealth and value out of every dollar in existence over time, typically in 30 year cycles. As things cost more, the value of what a dollar purchased in 1913 for example, is a lot more than what a dollar can purchase today.

    In the last 10 years however, the Fed has become more aggressive in it's monetary policy with the goal of increasing the money supply, but not the overall value of the economy. The net effect is more aggressive value decline in our purchasing power over the past 10 years.

    The purpose of this policy is to increase the divide between the mega rich and the rest of us so that most people can never threaten their hold on elite status. The mega rich own commodities, land, companies, etc. The rest of us typically own things tightly tied to the dollar, like heavily mortgaged residential homes, stocks, bonds, savings accounts and life insurance. We are one big financial crisis away from poverty or at a minimum, extremely hard times, financially.

    Have you ever noticed that how over a typical lifetime, your grandparents life insurance they bought in the 1940's or 1950's may have been anywhere from $25,000 to $100,000. Today, that sum is vastly under what you would need to survive the passing of a spouse without financial distress. Even a million dollar policy today would probably not last 10 years of providing financial security to the surviving spouse and children.

    The Federal Reserve is nothing more than a control mechanism to keep giving the mass populace of people the appearance of doing well, without ever letting them accumulate any real wealth. Most of the wealth we do accumulate is eaten up by the gradual and sometimes faster policy of creeping inflation that over time, sucks the very wealth right out of your dollar denominated investments.

    Adding some commodity based stocks and some gold and silver to your investment portfolio can help you avoid being linked to the Fed's value crushing dollar policy.

  • Report this Comment On April 13, 2013, at 7:37 PM, Kymwithay wrote:

    Fiance' and I have been thinking of getting married next year but I think we'll just keep living

    in sin. This crap is ridiculous.

  • Report this Comment On April 13, 2013, at 8:44 PM, RAPARTY wrote:

    So now lets make tax laws that penalize those who do the right thing. Just to make it more appealing to just live together but not marry. They are implementing subtle laws to make marriage less of an option. Tearing down the home even more but won't stop till its just a memory. I am sure that most people will just look at this as nothing but each step turns into a mile soon enough.

  • Report this Comment On April 13, 2013, at 9:21 PM, sciencedave wrote:

    Can not a married couple living together file separately in any income level?

    I believe everyone should do this married/ unmarried/ living together or not. Then we can avoid the tax code applying differently for status.

  • Report this Comment On April 14, 2013, at 1:16 AM, Elmoore wrote:

    Congress will try anything to get more of our money to buy votes to stay in their plush jobs.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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