Are you paying the IRS a marriage penalty? Tax Matters by David A. Katzman If you are married with a double income, you may be paying a marriage penalty when you file your federal income taxes. How much is that penalty? It depends on your personal circumstances, but the ramifications can be significant. A marriage penalty refers to a tax situation where the federal taxes owed on a couple’s joint return are higher than the amount the two would owe if each individual could file a single return. For taxpayers in the 15 percent tax bracket, the United States Congress addressed some of this issue by doubling that tax bracket for joint filers. However, taxpayers in higher tax brackets have not been provided with the same relief. At the simplest level, the marriage penalty occurs when a couple’s combined income forces them into a higher tax bracket. Generally, this occurs if both partners have relatively equal incomes. If there is a wide discrepancy in earnings, filing a joint return might save taxes, a marriage bonus, based on a simple analysis of the Internal Revenue Service (IRS) tax tables. For example, for 2008, a couple with a taxable income of $150,000 and filing jointly would pay $30,744 in federal income taxes. If they each filed as single, with a taxable income of $75,000 each, their combined total federal taxes would be $30,188, or $556less than their married filing jointly taxes. While the marriage penalty, if any, can be easily determined by looking at the tax tables and making a direct comparison regarding rate structures, the potentially bigger discrepancies are not so readily apparent. For higher wage earners, the marriage penalty could become particularly significant because of reduced itemized and personal deductions. For example, for the 2008 tax year a married couple begins to lose their itemized deductions after their combined adjusted gross income exceeds $159,950. If single, each individual’s income must exceed $159,950 before itemized deductions are reduced. Likewise, personal deductions are lost sooner for those filing jointly. For a married couple, personal exemptions are reduced at a combined adjusted gross income of $239,950. For single filers, reductions begin at an adjusted gross income of $159,950, or $319,900 for two single filers. Because of some special lower deduction reductions in 2008, the loss for married couples is somewhat lower than it is normally. However, the different treatment still results in less deductions, which means a higher adjusted gross income—and ultimately higher taxes. Married couples also face lower capital loss deductions. The maximum capital loss deduction for joint filers is $3,000 per year, which is the same for single filers. This means two single filers could deduct $6,000 in capital losses, or double the amount of a married couple. For taxpayers with losses from actively managed rental property, there is a marriage penalty, as well. The maximum passive activity loss for a married couple on rental property is $25,000, if their modified adjusted gross income is $100,000 or less. For single filers, each individual’s maximum deduction is $25,000 based on each individual’s modified adjusted gross income of $100,000. As you can see, the marriage penalty is much more far reaching than it initially appears from a simple examination of the tax tables. While there may be little recourse for married taxpayers, a tax professional can help you minimize your overall tax liabilities, which may help alleviate some of the detriment associated with the marriage penalty. David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.