The U.S. Tax Code has included subtle penalties (and occasional benefits) for married couples for as long as there have been tax tables, phase-outs, and deductions — sometimes two people are better off filing as separate taxpayers, while sometimes couples get a little bit of a break when they tie the knot. The penalties are hidden in various places throughout the tax code and are most easily spotted when looking at the tax brackets a married couple filing jointly uses versus the same two incomes applied to the single filing table.
There were discrepancies in several of the income tax brackets prior to the Tax Cuts and Jobs Act (TCJA) signed in late 2017 — incidents where the income brackets for married couples did not simply double the income levels in single filing brackets. Under TCJA, the income levels applied to married couples are now exactly twice those in single brackets for all but the top bracket, where single filers do not enter the 37% bracket as quickly as married filers do, relatively speaking.
Consider: under TCJA, individuals pay 35% income tax on income between $200,000 and $500,000. Comparatively, married couples pay 35% income tax on combined income from $400,000 up to only $600,000. The net result is that, for couples earning between $600,000 and $1,000,000, that additional income is taxed at 37%, even though it would have been taxed at only 35% had they each filed as single taxpayers. The 2% difference on $400,000 works out to a marital tax “penalty” of $8,000.
The Medicare Surcharge Tax of .9% also penalizes high-earning couples. An individual is subject to the tax on earnings over $200,000, while a married couple is subject to the tax on earnings over $250,000.
The phase-outs for many tax items are not based on a simple table in which married filers have twice the thresholds of single taxpayers. Personal Exemptions phase out—inconsistently, at $266,700 in income for single taxpayers, compared to $320,000 for married filers — as do limitations on many itemized deductions for high-income earners (called the Pease Limitations), which follow the same phase-out thresholds.
On the other end of the income spectrum, couples may also be penalized for saying “I do,” because the phase-outs of the earned income tax credit often come into play when incomes are aggregated on a “married filing separately” return.
Being aware of these idiosyncrasies of the tax code is the first step to managing your taxes around them. At Arnerich Massena, we work to manage assets as tax-efficiently as possible, we strategically allocate assets in client accounts based on the tax characteristics of each, and we work with our clients’ accountants to develop the most tax-efficient strategies possible.