Tax Code's Marriage Penalty Varies Greatly with Income

January 10, 2013

Lopsided Earnings Lead to Smaller Tax Hit

Washington, D.C., January 10, 2013—Marriage has the potential to create a significant tax penalty, but it can also lead to a tax bonus in other situations, and for most taxpayers, determining the effect is anything but simple, according to a new analysis by the Tax Foundation.

“In general, there tends to be a marriage tax bonus when the two partners have widely disparate incomes and a marriage tax penalty when they have similar or equal incomes,” said Tax Foundation analyst and programmer Nick Kasprak.

There are two countervailing forces at work—on the one hand, the higher tax rate brackets kick in at greater income levels for joint filers than for single filers, but on the other hand, adding two incomes together can more than compensate for this effect. The need to balance these two effects is inherent in any tax system with a joint filing status—efforts to reduce the marriage bonus for certain filers will necessarily lead to a marriage penalty for others and vice versa.

With disparate incomes, a bonus results, because the addition of a small income to a much larger one is usually not enough to lift the return into the raised bracket, but in other cases, the combination of two incomes of similar size can bring the return into the higher tax bracket even despite the generally raised bracket levels for joint filers. The strongest impact is therefore on two-earner couples. If a couple has one wage earner and the nonworking spouse is trying to decide whether or not to re-enter the workforce, he or she will need to consider the high marginal tax rates that will be levied on the second salary.

Marriage penalties tend to affect low income and high income couples, but not middle income ones—low income couples because of the marriage penalty inherent in the structure of the Earned Income Tax Credit (EITC) and high income couples because the 28 percent rate bracket and above for joint filers begins at less than twice the amount for single filers. Middle income couples are much more likely to receive a marriage bonus simply because there is no penalty inherent in the bracket structure for the 25 percent rate levels and below—for joint filers, each bracket begins at exactly twice that for single filers.

Tax Foundation Fiscal Fact No. 352, “Effects of Marriage on Tax Burden Vary Greatly with Income Level, Equality” by Nick Kasprak is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Borean, the Tax Foundation’s communications associate, at 202-464-5120 or borean@taxfoundation.org.

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