Marriage penalty

What Is Marriage Penalty?

The marriage penalty is a phenomenon in Taxation where a married couple's combined Tax liability is higher than the sum of the individual tax liabilities they would incur if they remained single and filed separately. This occurs under a Progressive tax system when the tax brackets for married couples are not exactly double those for single filers, or when other tax provisions and Tax credits are structured in a way that disadvantages joint filers with similar incomes. The marriage penalty is not an explicit tax; rather, it's an outcome of how certain tax laws interact with marital Filing status.

History and Origin

The concept of a marriage penalty in the U.S. federal income tax system has roots tracing back to 1913, though it became more pronounced with specific legislative changes. Prior to 1948, most taxpayers filed separate returns, and state property laws could significantly affect a couple's federal tax liability.²⁸ In 1948, Congress introduced the concept of universal Income splitting for married couples, allowing their tax liability to be calculated as double the liability on half of their combined income.²⁷ This generally resulted in a "marriage bonus" for most couples.²⁶

However, to address equity concerns between married and single taxpayers, the Tax Reform Act of 1969 established separate rate schedules based on filing status, which, while aiming for fairness, inadvertently created situations where marrying could lead to a higher tax burden, thus embedding the marriage penalty within the tax system.²⁵,²⁴ Subsequent tax reforms, including the Tax Reform Act of 1986, the Taxpayer Relief Act of 1997, and the Economic Growth and Tax Relief Reconciliation Act of 2001, have attempted to alleviate the marriage penalty, but it has largely persisted in various forms.²³ According to the American Economic Association, a marriage penalty or subsidy generally arises when a tax or transfer program bases taxes or subsidies on Household income and applies different Marginal tax rates at different income levels.²²

Key Takeaways

• The marriage penalty occurs when a married couple's combined tax liability is greater than if they filed as single individuals.
• It typically impacts dual-earner couples with similar incomes, particularly at higher and lower income brackets due to progressive tax structures and credit phase-outs.
• The marriage penalty is not a direct tax but an outcome of how tax brackets and deductions are structured for different filing statuses.
• This phenomenon can affect decisions related to labor force participation, especially for secondary earners.
• Conversely, a "marriage bonus" can occur when marriage results in a lower combined tax liability, often for couples with disparate incomes or single-earner households.

Formula and Calculation

The marriage penalty does not have a single, universal formula because it arises from the interaction of various components of the tax code. Instead, its existence and magnitude are determined by comparing two hypothetical scenarios:

1. The combined tax liability of two individuals if they file as single taxpayers.
2. The tax liability of the same two individuals if they file as a married couple (usually Married filing jointly).

The "penalty" occurs if the second scenario results in a higher tax owed. This comparison involves applying the appropriate tax brackets, Standard deductions or Itemized deductions, and Tax credits for each filing status.

For example, consider two individuals, each with an Adjusted Gross Income (AGI) of (I_1) and (I_2) respectively.

If they are single, their total tax liability would be:

If they are married filing jointly, their total tax liability would be:

The marriage penalty ((MP)) is then:

A positive (MP) indicates a marriage penalty, while a negative value signifies a marriage bonus. The calculation requires detailed knowledge of the applicable tax laws for the given tax year.

Interpreting the Marriage Penalty

Interpreting the marriage penalty involves understanding its impact on a couple's disposable income and financial planning. A significant marriage penalty means that a couple pays more in taxes simply by being married than they would if they were legally single, all else being equal. This additional tax burden can influence household budgeting and long-term financial goals.

The severity of the marriage penalty often depends on the relative incomes of the spouses. Couples with similar incomes are more likely to face a marriage penalty because their combined income can push them into higher tax brackets more quickly than if they filed as two single individuals.²¹ Conversely, couples where one spouse earns significantly more than the other often experience a "marriage bonus" or "marriage benefit," as the higher earner's income is effectively "split" with the lower earner's, potentially lowering their overall Marginal tax rate and overall Taxable income.²⁰,

Hypothetical Example

Consider a hypothetical couple, Alex and Ben, both working and earning similar salaries.

Scenario 1: Alex and Ben are single.

• Alex's taxable income: $80,000
• Ben's taxable income: $80,000

Assuming 2024 tax brackets (simplified for illustration):

• Single filing status, 22% bracket up to $95,375.
• Alex's tax liability: $10,000 (hypothetical calculation based on bracket progression)
• Ben's tax liability: $10,000 (hypothetical calculation based on bracket progression)
• Total combined tax as singles: $20,000

Scenario 2: Alex and Ben are married, filing jointly.

• Combined taxable income: $160,000
• Married filing jointly status, 22% bracket up to $190,750 (but with differing thresholds than single)

The actual tax calculation for married filing jointly might see a larger portion of their combined income fall into a higher tax bracket (e.g., 24%) sooner than if they remained single, resulting in a higher total tax. For instance, if their combined income of $160,000, due to the married-filing-jointly tax bracket structure, results in a total tax of $22,500.

In this simplified example, the marriage penalty for Alex and Ben would be:
$22,500 (married tax) - $20,000 (single tax) = $2,500.

This $2,500 represents the additional Tax liability they incur solely by virtue of being married and filing a joint tax return, compared to if they remained unmarried. This example demonstrates how the marriage penalty can arise when tax brackets for married couples are not simply double those for single individuals, particularly for dual-earner households with similar incomes.

Practical Applications

The marriage penalty has several practical implications for personal finance and policy. It primarily arises within the Taxation system, affecting how couples strategize their income, deductions, and credits.

One significant practical application is its potential impact on Labor supply. For instance, the secondary earner in a married couple may face a higher effective Marginal tax rate due to their income being added on top of the primary earner's income.¹⁹,¹⁸ This can reduce the incentive for that individual to work more hours or even enter the workforce, as a larger portion of their additional earnings would go towards taxes. Research from the National Bureau of Economic Research suggests that eliminating marriage-related tax provisions could significantly increase the labor force participation of married women.¹⁷

Furthermore, the marriage penalty can influence decisions regarding major financial events, such as when to retire or how to structure investments. For example, some tax benefits related to Capital gains or specific retirement account contributions might be affected by combined Household income thresholds, leading to a penalty. It also appears in how certain Tax credits, like the Earned Income Tax Credit (EITC), are phased out. A married couple's combined income might push them past the eligibility threshold for these credits, whereas they might have qualified as single filers.¹⁶,¹⁵ The IRS provides guidance on choosing the appropriate Filing status to help taxpayers understand these implications.¹⁴

Limitations and Criticisms

The marriage penalty, despite attempts at reform, continues to be a subject of debate and criticism. One of the primary limitations is its perceived unfairness, as it imposes a higher tax burden on some married couples solely due to their marital status.¹³ Critics argue that the tax code should be neutral with respect to marriage, meaning a couple's tax liability should not change simply because they marry.

Academics and policy analysts have highlighted that the marriage penalty is a byproduct of three often-conflicting objectives within a progressive income tax system: progressivity (higher earners pay a larger percentage of their income in taxes), equal taxation of households with the same income (regardless of who earns it), and marriage neutrality.¹² It is mathematically impossible to achieve all three simultaneously. Therefore, addressing the marriage penalty often involves trade-offs that might impact one of the other objectives.

Another criticism is its potential to disincentivize labor force participation, particularly for secondary earners. When a spouse's additional income is taxed at a higher Marginal tax rate due to the combined Household income, it can reduce the financial benefit of working more or entering the workforce.¹¹ Some argue that this effect disproportionately impacts women.¹⁰

While the Tax Cuts and Jobs Act (TCJA) in 2017 mitigated some aspects of the marriage penalty, especially for middle- and high-income earners by widening some tax brackets for joint filers, it did not eliminate it entirely.⁹,⁸ In some cases, the penalty persists, notably for very high-income couples and those affected by certain deductions or credit phase-outs, such as the limit on state and local tax (SALT) deductions.⁷

Marriage Penalty vs. Marriage Bonus

The terms marriage penalty and marriage bonus describe opposite outcomes resulting from how the U.S. tax code treats married couples compared to single individuals.

Confusion between these two concepts often arises because the U.S. tax system's design means that the act of getting married can lead to either a higher or lower tax bill depending on the couple's specific income levels and financial circumstances. The same tax law provisions that create a marriage penalty for some couples can result in a marriage bonus for others.

FAQs

Why does the marriage penalty exist?

The marriage penalty exists primarily because of the interaction of a Progressive tax system with differing tax bracket widths and credit phase-out thresholds for single individuals versus married couples filing jointly. It arises when the tax brackets for married filers are not precisely double those for single filers, particularly at certain income levels, causing combined incomes to hit higher tax rates faster.⁶

Which couples are most affected by the marriage penalty?

The marriage penalty most commonly affects dual-earner couples where both spouses earn similar incomes. When their incomes are combined on a joint return, they can be pushed into a higher Marginal tax rate or lose eligibility for certain Tax credits faster than if they had remained single and filed separately.⁵

Can filing separately avoid the marriage penalty?

Sometimes. While Married filing jointly is often more advantageous, in some cases, filing separately can reduce or eliminate a marriage penalty. This might occur if one spouse has significant Itemized deductions (like large medical expenses) that would be limited by a higher combined Adjusted Gross Income on a joint return. However, filing separately can also mean losing access to certain tax credits or deductions, so it requires careful calculation and comparison.⁴

Does the marriage penalty affect all income levels?

The marriage penalty can affect couples at various income levels, but its impact varies. It tends to affect both high-income couples, whose combined earnings push them into the highest tax brackets, and low-income couples, particularly those who lose eligibility for benefits like the Earned Income Tax Credit when their incomes are combined.³,²

Is there a "marriage bonus"?

Yes, a "marriage bonus" or "marriage benefit" is the opposite of a marriage penalty. It occurs when a married couple's combined Tax liability is lower than the sum of their individual tax liabilities would be if they were single. This typically benefits couples where one spouse earns significantly more than the other, as their combined income may fall into lower tax brackets or allow for greater tax savings through mechanisms like Income splitting.¹,