You may have heard the term "marriage penalty" before but aren't quite sure what it means. Even if you're familiar with the fact that your taxes could potentially go up after you get married, you might be surprised just how many parts of the tax code favor single filers.
With that in mind, I asked Dave DuVal, vice president of consumer advocacy at TaxAudit.com, for some examples of deductions and credits that penalize married couples. Here are 10 of the most common.
10 marriage penalties that could increase your taxes
- Tax brackets. This is what most people think of when they hear the term "marriage penalty." Basically, you might think that the tax bracket thresholds would double for married couples, since it's based on two people instead of one. So, since the highest (39.6%) tax bracket kicks in after $413,201 for single filers, you might think it would start at twice that amount-$826,402 – for married joint filers. However, the 39.6% bracket for couples starts at $464,851, just 12.5% more than for singles.
- Phase-out of personal exemptions and itemized deductions. Start at $258,250 for singles and $309,900 for married couples.
- Child Tax Credit. Phase-out begins at $75,000 for singles and $110,000 for married couples.
- Earned Income Tax Credit. With one child, the credit phases out at $39,131 for singles and $44,651 for married couples.
- Traditional IRA deduction. You can deduct your full contribution to a traditional IRA with an AGI up to $61,000 if you're single and covered by a retirement plan at work, but the threshold for married couples is $98,000 -- just 61% more.
- Rental real estate losses. Maximum amount of passive loss allowed is $25,000 if AGI is below $100,000 regardless of filing status.
- Capital losses. You can use up to $3,000 of capital losses to offset other income. The limit is the same for single and married taxpayers.
- Additional Medicare Tax and Net Investment Income Tax. The threshold for these additional taxes is $200,000 for singles and $250,000 for married joint filers.
- Mortgage interest. A single taxpayer can deduct the interest on a mortgage loan amount of up to $1.1 million. So can married couples.
- Social Security. The income threshold to determine whether any Social Security will be taxable is $25,000 for singles and $32,000 for married couples.
Why are these "penalties"?
To illustrate why these aspects of our tax law can hurt married couples, consider this example. Let's say that you live with your boyfriend/girlfriend, and that you both own rental properties. Since you both file as single, you have the ability to deduct a combined $50,000 in passive rental losses on your taxes. If you get married, your deduction gets chopped in half.
Similarly, two single people can each earn up to $61,000, or $122,000 total, and still get a full traditional IRA deduction if you are covered by a retirement plan at work. However, if those two people were to get married, the ability to take any traditional IRA deduction completely phases out above $118,000, so not only would they not qualify for the full deduction -- they would get none at all. The list goes on.
As DuVal says, "Am I better off living with my girlfriend or getting married? Make sure Cupid answers the question and not the tax man!"
A final thought to keep in mind
While the marriage penalty is indeed real, there's one final point to keep in mind. It's only a marriage "penalty" if both spouses work, own rental property, have capital losses, and so on. If a couple gets married and only one spouse works, the "married filing jointly" tax brackets will actually save the couple money.