Tying the knot this year? Add ‘marriage tax penalty’ to potential cost
Gorodenkoff | Istock | Getty Images
The IRS is a buzzkill if you are happy to say “I do” in this year’s wedding.
While many couples end up paying less in taxes after tying the knot, some face a “marriage penalty” — meaning they end up paying more than if they had remained unmarried and filed as single taxpayers.
The penalty can happen when tax-bracket thresholds, deductions and credits are not double the amount allowed for single filers — and that can hurt both high- and low-income households.
It used to be much more widespread before the internet. Garrett Watson is a Senior Policy Analyst at the Tax Foundation. It’s much more common for couples to receive a bonus or a penalty. But the details are important.
With an record 2.5 million weddings expected this year, newlyweds — especially those who earn similar amounts — may want to scrutinize how their married status will affect their tax situation.
Marriages that take place during this calendar year must be completed by spouses. They will need to file their 2022 tax return (due April 22, 2023) jointly or as an individual. (However, filing separate returnsIt is not financially advantageous for spouses in some situations.
Let’s find out what you need to know.
For higher income earners, there are many ways to get more tax.
In 2022 the federal top rate of 37% will apply to taxable income up to $$539 901 for single filers. However, married couples filing jointly will be subject to the higher rate of 37%, which is applied to their income up to $647,851.
All the [income]Watson stated that brackets are twice as big except for the top bracket.
As an example, two individuals with $500,000 each in income will fall under the bracket having the highest tax rate (35%) if they file as one taxpayer.
But, if they are married and have a combined income of $1,000,000, 37% would apply to $352,149 (the difference between their incomes and $647,851 for the higher rate).
Higher earners can be negatively affected by other parts of the tax code if they get married.
For instance, the regular Medicare tax on wages — 3.8%, which is split between employer and employee — applies to earnings up to $200,000 for single taxpayers. Above that amount, a Medicare additional tax of 0.9% is applied.
The extra tax is applicable to married couples at 250,000.
Singles who have a modified adjusted gross income of more than $200,000. are subject to a 3.8% tax on investment income. For married couples whose income exceeds $250,000. the couple must pay the levy. The tax is applicable to income above $250,000.
Additionally, the limit on the deduction for state and local taxes — also known as SALT — is not doubled for married couples. Both single and married filers are subject to the $10,000 limit. Separately, married couples can claim $5,000. The write-off can only be claimed by taxpayers who are itemized.
A marriage penalty may be imposed on couples who have lower incomes. This can happen because of the earned income tax credit.
Working taxpayers who have children are eligible for the credit, provided they meet certain income requirements. The credit is available for low income earners who have no children.
For married couples, however, the income limit that comes with the tax relief is not increased by two. Also, the 2021 credit has ended.
One taxpayer may be eligible to receive a maximum of $6,935 for three children or more, with a total income of $53,057 in 2022. The cap for married couples is $59,187.
You may find a marriage penalty depending on where you live. Maryland, for example, has a maximum rate of 5.7% for couples with income over $300,000.
According to the Tax Foundation, some states permit married couples to file separate returns to avoid being subject to a penalty or losing credits or exemptions.
If you have Social Security retirement benefits already, it is possible to get married.
If your adjusted gross, nontaxable income and half your Social Security benefits exceed $25,000 for single filers you will not be subject to taxes. For married couples, however, the threshold is $32,000 rather than the double amount that individuals have.
Also, if your new spouse makes contributions to individual Roth or traditional retirement accounts, be aware of how much you are putting into those IRAs. Limitations apply for deductions, contributions and income received from spouses.