The U.S. federal tax system has featured some form of higher income taxes for dual-earner married couples than for two unmarried persons since 1913; this is commonly referred to as the marriage tax penalty. Similar to prior tax reforms, the law known as the Tax Cuts and Jobs Act (TCJA) (1) preserved the penalty for marriage, reducing some components and creating some new concerns.
This article explores the current state of the marriage tax penalty, identifying some important sources and their related costs. The analysis also reveals which working couples are unaffected by the penalty and potentially the beneficiaries of a marriage tax subsidy. This article's purpose is not to influence couples' marriage decisions but to inform tax professionals, taxpayers, and regulators regarding the current state of the extra tax burden associated with marriage.
Brief history and background
The dual-earner marriage tax penalty is created by several provisions. The Revenue Act of 1913 (2) created the first provision, the standard deduction, by providing a $6,000 deduction for unmarried dual-earner couples ($3,000 per single taxpayer) but only $4,000 for married couples. The head-of-household (HOH) status was introduced in 1951 to provide tax relief to war widows. However, by creating preferential treatment for unmarried working parents, this new tax status magnified the dual-earner marriage tax penalty for married parents of dependent children.
The Tax Reform Act of 1969 (3) established a progressive tax rate structure based on taxpayers' filing status (e.g., single, married filing jointly (MFJ), or HOH), thus expanding and firmly embedding the marriage tax penalty within the tax system. Still later, the Tax Reduction Act of 1975 (4) created the earned income tax credit (EITC) to help low-income working households. However, while well intended, the credit was introduced in a manner that further expanded the marriage tax penalty for low-income, married working parents of dependent children.
These fundamental tax provisions (5) establish the following taxing order: Single-earner married couples incur the lowest tax burden; unmarried dual-earner couples incur a greater burden; and dual-earner married couples incur the greatest burden. Over the years, Congress has modified the marriage tax penalty through various tax reforms, including, most recently, the TCJA. However, since 1913, the federal income tax burden of a dual-earner couple generally increases if they marry, and this penalty is greater if the couple have dependent children.
The marriage tax penalty following the TCJA
The TCJA greatly modified many components of the Code, including those affecting the marriage tax penalty. The following discussion presents the sources of the marriage tax penalty in the post-TCJA era. While some working couples without dependent children may now be unaffected by the penalty, the Code continues to penalize dual-earner married couples with dependent children. Further, many couples, with and without children, including Baby Boomers who are retiring, may be affected by several new deduction limitations.
Marriage tax neutrality or subsidy
Because the TCJA expanded some reforms introduced by the American Taxpayer Relief Act of 2012 (ATRA), (6) the Code provides greater equity for dual-earner couples with no dependent children. In other words, the 2018 Code may in some situations impose a tax burden on a married couple filing jointly similar to that of two single filers combined. The table "Effect of Standard Deductions on Filing Statuses," on p. 440, presents the 2018 standard deduction amounts and tax brackets for single, MFJ, and HOH taxpayers. ATRA equalized the standard deduction, establishing that the standard deduction for an MFJ couple should equal that provided two single taxpayers. The TCJA increased both standard deductions, preserving this equality. In 2018, the $24,000 MFJ standard deduction equals twice the $12,000 single filers can claim.
In addition, ATRA partially equalized the tax brackets so that married couples may have the same amount of taxable income subject to the lower brackets (15% or less) as two similarly situated single taxpayers combined. The TCJA further expanded the equality of the progressive rate system. Beginning in 2018, the tax brackets of an MFJ couple are equal to those provided two single taxpayers through $600,000 of taxable income. Therefore, beginning in 2018, there may be no marriage tax penalty for many dual-earner couples with combined adjusted gross income (AGI) of $624,000 or less. (7) Married couples with AGI in excess of $624,000 may pay the highest marginal tax rate of 37%, while their unmarried counterparts may not be subject to the top rate until their combined AGIs exceed $1,024,000.
If the couple do not support dependent children and have unequal incomes, i.e., one partner's income significantly exceeds his or her partner's, the couple may enjoy a tax subsidy if they marry. This marriage tax subsidy is a consequence of income sharing. While a married couple combine their income to take full advantage of the lower tax brackets, the higher-earning unmarried partner may pay a significantly higher marginal tax rate than his or her partner.
One type of couple has benefited from a marriage tax subsidy since 1913: the single-earner couple. When a working taxpayer marries a nonworking partner, the taxpayer's tax status generally shifts from single to MFJ, which increases the standard deduction, reduces the tax liability under the progressive rate system, and provides a variety of preferential tax treatments. The TCJA preserved this preferential treatment for single-earner married couples.
The liberation from the marriage tax penalty or the presence of a marriage tax subsidy only applies to a defined group of couples, i.e., those without dependent children, with unequal earnings, who do not claim some common deductions, and/or who are not collecting Social Security benefits. However, the majority of American couples are not single-earner, (8) and many have dependent children living in the household. Therefore, it is important to examine how the marriage tax penalty affects those households.
Marriage tax penalty
The TCJA preserved the HOH status. While there is some equalization between an MFJ couple and two singles, there is no similar equity when one of the unmarried partners can claim HOH status. In other words, when one partner files as single and one claims HOH status, the unmarried couple receive preferential tax treatment relative to their MFJ counterparts.
Specifically, the Code provides the unmarried couple with a greater combined standard deduction, $30,000 ($18,000 HOH plus $12,000 single), relative to the MFJ couple's $24,000, and a lower marginal tax rate because of the expanded lower tax brackets provided to HOH filers, as presented in the table "Effect of Standard Deductions on Filing Statuses." A couple with one HOH filer has more income subject to no tax, to the 10% rate, and to the 12% rate. Consequently, an MFJ couple pay a higher effective tax rate (average of AGI) relative to their unmarried counterparts. The chart "Effective Tax Rate for MFJ Couple vs. Unmarried Couple," on p. 445, estimates this difference and illustrates the influence of HOH status on couples' marriage tax penalty.
Because the Code provides...