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Single = Married/2?

August 26, 2008

I’m not a tax expert, nor am I sure why I’m thinking about taxes in August.

Well, actually I am sure. I’ve had two married couples tell me how great of a tax deal it was for them to get married, and I was confused. I’d heart that there was once a marriage penalty, and I’ve heard that it was eliminated, but a marriage tax break? I wouldn’t be surprised, given the favorable tax treatment the government uses to promote homeownership and families.

I researched it a little online, and got confused. Intuitively, I thought marriage would be transparent to taxes, but that is not the case. I suppose it would get complicated when you had shared deductions, but to me it would just make sense for two non-marrieds to have the same tax burden as before, once they tied the knot.

I came to the conclusion that the reason both couples saw being married is a tax perk is because only one of them is working. Their logic of saying that it is a tax benefit is a little skewed, because they pretty much forfeited one person’s salary for this so called “break”. It’s like quitting your job to save $8000 a year.

I did glance at the brackets, and I’m not exactly sure where they came from, but I’m sure someone did some math and decided these were fair.  I hope so, at least.

In summary, here’s what I think about taxes:

  • Our tax system is complicated and confusing
  • The mortgage interest tax deduction is not good, and did not originate for the reasons people assume. Our tax treatment fuels the idea that everyone should be a homeowner as soon as possible. However is too ingrained in the system to be done away with.
  • Some redistribution of the wealth is good for a stable society. Communism is not, but a strong middle class makes for stable and strong countries. I’m not talking Robin Hood, but people shouldn’t go hungry.
  • Taxes need to go up and/or spending needs to go down. We can’t fund a war and all our social programs
  • Single does not equal to married/2. Tax math is not so simple.
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13 Comments leave one →
  1. Stephanie permalink
    August 26, 2008 7:25 pm

    Wow, I never realized the tax implications of both persons making a large salary. Honestly, if I my husband and I were both making over $100k a year, I think I would think about getting a legal divorce. We would still live together, have our church marriage, and basically change nothing…but I can’t see paying like $30k a year to be able to tell people that we are legally married…especially when that matters very little.

  2. August 26, 2008 9:09 pm

    Stephanie- I think you could be married, and just file separately. Like i said, not a tax expert, but I think that would be possible.

  3. August 26, 2008 11:32 pm

    Interesting…

    Take a look at this:

    http://moneycentral.msn.com/content/Taxes/P48908.asp

  4. Stephanie permalink
    August 27, 2008 8:59 am

    “Stephanie- I think you could be married, and just file separately. Like i said, not a tax expert, but I think that would be possible.”

    You may be right, but I looked at and it didn’t look as good as being single…but I am not a CPA.

  5. Andrew Stevens permalink
    August 28, 2008 8:02 am

    She is definitely incorrect. The marriage penalty for two people both with comparable incomes in the higher income brackets cannot be avoided by filing separately. For one thing, there are many tax breaks available to single people and married people filing jointly which are unavailable to married filing separately (e.g. educational tax credits). The tax brackets for married filing separately also accelerate faster than the tax brackets for single people (they are jointly/2, not single tax brackets).

    It works like this: if you and your spouse have huge disparities in your income, i.e. one person makes a lot more than the other, then marriage gets you a tax break. (The tax breaks to the higher income individual outweighs the tax losses to the low earner.) However, if you and your spouse make more than $150,000 a year jointly and there is no massive disparity in income, then you’re paying a tax penalty for being married. (Fortunately, the penalty for the 10% and 15% brackets were eliminated by the Bush tax cuts of 2003. It used to be the case for virtually all married couples. My wife and I suffered marriage penalties prior to 2003 even though our income was far below $150,000 at the time. It usually ran from a few hundred to about a thousand dollars a year we were paying for being married.)

  6. August 28, 2008 8:38 am

    Thanks for the extra insight Andrew. I’ve only ever filed single, so… I have no idea.

    I just wonder why marriage isn’t transparent to taxes. See link posted by trevor, and it said before the fix of the taxes, about half of the people were paying a penalty, while another half were getting a tax break.

    How confusing.

  7. Stacey permalink
    August 28, 2008 2:01 pm

    I highly doubt my husband and I will ever break the 15% tax bracket, even with our combined salaries, but that’s beyond the point. It does seem awfully unfair after you break the $130,000 barrier. There should be no punishment or reward for marriage. (I’m all for the saver’s credit, though!)

    We did see several financial benefits to marriage, mainly in our car and homeowners’ insurance rates.

    Oh, and the tax break on mortgage is so over-rated. You’re not missing out. We paid “only” $8,000 in interest during our first year as homeowners, so it won’t be long before itemizing has no benefits for us. Our home is solidly middle-class, and rather nice for the area… but I don’t think that tax break was written for us middle-class folks.

  8. Andrew Stevens permalink
    August 28, 2008 10:22 pm

    It’s not as easy as you might think to actually attain equity. E.g. we could have all people file individually (and in fact this was the system prior to 1948). However, now you have John who makes $10,000 a year and pays no taxes married to Jane who makes $10,000 a year and pays no taxes. Together, they still pay no taxes. But over here we have George who makes $20,000 a year and pays $1,000 a year in taxes married to Laura who makes $0 a year and pays no taxes. Both couples make $20,000 a year, but John and Jane pay no taxes while George and Laura pay $1,000 a year. This seems unfair to George and Laura who pay more taxes, but aren’t any better off than John and Jane.

    This was changed in 1948 to make the tax code “couples-neutral.” This created marriage bonuses, but no marriage penalties. However, those bonuses have to come from somewhere and obviously the people they come from are single people. It’s clear to see that George paid more in taxes before he got married than he does after (his tax bill falls from $1000 to $0). Because of the perceived inequity to single people, Congress created the hybrid marriage bonus/penalty system in 1969 (some couples get bonuses if they have disparities in their income, others get penalized if their incomes are roughly similar). It’s crucial to realize that the marriage penalty is not a “quirk” of the tax code as people seem to think; it absolutely was planned in order to combat perceived unfairness to single people.

    I currently receive a large marriage bonus since I now make substantially more than my wife and being married to her allows me to keep various tax breaks which I would have passed the income limits for were I single, so obviously I’m not going to complain about the marriage bonus if it were extended to all married couples. (And I would probably be bitterly complaining about the various marriage penalties if she made an income roughly comparable to my own.) However, I might very well object were I single. There is no way around perceived inequities as long as you have a progressive income tax. This isn’t to say that we should all clamor for a flat tax or a consumption tax, but a progressive income tax will always have problems like this. It’s built into the system.

  9. August 28, 2008 10:39 pm

    Thanks again Andrew. That makes a lot more sense than the couple articles I turned up on there. The historical background explains a lot.

    Though I plan to be married someday, it does seem unfair to have a marriage bonus for 100% of the people. But if I were in the 50% who had a marriage penalty, I’d be unhappy.

    I think the first scenario, where george and laura have to pay more taxes, seems the most fair. That is what they paid as single people. but I can see how that could be argued and be unfair.

    Hmm….

  10. Andrew Stevens permalink
    August 29, 2008 8:23 am

    I suspect you have a bias of your own here. Your method is geared to the benefit of couples who do make similar amounts of income (the exact same couples currently being disadvantaged). “Power couples,” where both spouses make a high income, would be enormously advantaged in your model to the detriment of families with stay-at-home spouses.

  11. August 31, 2008 11:16 am

    Off topic but I keep reading how relationships/marriages are usually peoples worst money mistakes. Most likely the choice of mate but still kind of scary……

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