The CPA Journal

By Andrew D. Sharp

In 1948, Congress enacted an income tax rate structure for married taxpayers filing joint returns. Congress intended the new rules to favor married taxpayers, but in some cases, taxpayers would be assessed less income tax if they were unmarried and filed separate tax returns. The additional amount of income tax a joint tax return can produce is often referred to as the “marriage tax,” and usually occurs when both spouses have large taxable incomes.

A marriage tax exists if a married couple filing jointly would owe more tax than both filing separately. The opposite, a marriage subsidy, exists if a married couple filing jointly would owe more tax than both filing separately. The marriage tax has the greatest impact when the taxable incomes of each spouse are similar. The taxable incomes of husbands and wives are normally closer for middle- and lower-income couples than for wealthy couples.

The Choice

Married couples may file either a joint tax return or separate returns. When married individuals elect to file separate returns, each spouse reports only their own income, exceptions, deductions, and credits. Each spouse must use the Tax Rate Schedule applicable to married taxpayers filing separately. Certain aspects of filing separately are disadvantageous; for example, child care credits are not available.

While it is generally more beneficial for married taxpayers to file a joint return when both spouses have taxable income, they should calculate their income tax both ways, jointly and separately, and choose the filing status that yields the lower income tax.

Setting the wedding date can be a function of income levels. When one spouse-to-be has significantly less income than the other, a December wedding would be more tax-advantageous than January. In this case, filing jointly will generally result in less tax on the same amount of income than filing two single tax returns.
If both spouses-to-be have similar levels of income, they should choose January instead of December as the wedding date. If filing jointly, a December wedding triggers the marriage tax a year earlier.

Possible Solutions

The marriage tax would obviously be eliminated if the income tax system were a flat tax rather than a progressive tax. The pooling of spousal incomes would then not have an effect on the tax rate, regardless of relative income. A few years ago, Representative Dick Armey floated the idea of a flat income tax of 17%, but the proposal did not receive support in Congress.

Another way to eliminate the marriage tax would be to simply tax the income of spouses as single individuals. Under this method, married couples would continue to file a joint return, but would be taxed on their individual earnings and their common income from other sources. Separate taxation of the spousal income in this manner accomplishes marriage tax-neutrality without a complicated system of tax exemptions and credits.

What the Numbers Reveal

The following analysis reveals the impact of the current marriage penalty tax on four single taxpayers. Taxpayers A, B, C, and D have taxable income after deductions and exemptions of $30,000, $35,000, $55,000, and $55,000, respectively. Using the 2000 Tax Rate Schedule for individuals, their income tax calculations are: A, $4,988; B, $6,388; C, $11,988; and D, $11,988 (Exhibit 1).

Exhibit 2 is based on the same taxable income levels for the four taxpayers as in Exhibit 1, except A and B are now married and C and D are married. Thus, A and B have a combined taxable income of $65,000, while C and D have a combined taxable income of $110,000. Using the 2000 Tax Rate Schedule, A and B have a tax bill of $12,500 when filing jointly; C and D, $25,221. The two married couples have the same tax bill when filing separately as they do filing jointly. This yields an average tax rate of 19.23% for A and B and 22.92% for C and D, respectively.

Exhibit 2 also shows the income taxes for A and B and C and D under the assumption that the earnings of each spouse are taxed as single individuals under the 2000 Tax Rate Schedule. The combined taxes are $11,376 for A and B and $23,976 for C and D. Thus, the average tax rate for A and B is now 17.50%, and for C and D, 21.79%.

Exhibit 3 shows the marriage tax for A and B and C and D under the 2000 Tax Rate Schedule. A and B incur a marriage tax of $1,124, while C and D incur a marriage tax of $1,245. For A and B, this represents a 9.88% increase in income tax; for C and D, 5.19%.

Effect of the 2001 Tax Act

The Economic Growth and Tax Relief Reconciliation Act of 2001 includes a provision that will provide marriage tax relief. Beginning in 2005, the basic standard deduction for married taxpayers filing jointly will increase. The current standard deduction for a joint return is approximately 167% of the standard deduction for a single taxpayer. From 2005 to 2009, this will steadily increase from 174% to 200%.

Starting in 2005, married taxpayers filing separately will have the same standard deduction as single taxpayers. From 2005 to 2008, a married couple filing separately will receive a greater combined standard deduction—double the standard deduction for single taxpayers—than if filing jointly.

Married taxpayers filing jointly will also have more of their income taxed at the 15% rate in 2005. Currently, the 15% bracket for a joint return is about 167% of the bracket for a single return. From 2005 to 2008, this percentage will slowly rise from 180% to 200%. Even though this change is described as tax relief for two-earner married couples, the increase actually applies to every joint return, even if only one spouse has income.

Starting in 2005, the 15% bracket for married taxpayers filing separately will be set at 50% of the bracket for joint filers. As of 2008, the 15% bracket will be the same for single taxpayers and married taxpayers filing separately. As the 15% bracket adjusts upward from 2005 to 2008 for married taxpayers filing jointly, the 15% bracket for married taxpayers filing separately will increase from 90% to 100% of the 15% bracket for single taxpayers.

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Andrew D. Sharp, PhD, CPA, is an associate professor of accounting at Spring Hill College, Mobile, Ala.