Joint Filing in the Tax Code
June 26, 2013
This morning, the Supreme Court struck down Section 3 of the Defense of Marriage Act, which defines marriage as between a man and a woman for federal purposes. This is great news for gay couples who are legally married according to their state’s law – among many other things, it allows them to file their taxes jointly, which usually (but not always) leads to a lower tax burden.
The federal income tax has existed continuously for a century – one can trace its history back to the sixteenth amendment, ratified in 1913. The tax was highly progressive in its early days – for example, the rate schedule for tax year 1918 consisted of no less then forty nine tax brackets. One consequence of tax progressivity is that there is an incentive to spread income around – the more concentrated it is, the higher the tax rate.
For married couples, this meant an incentive to split incomes – if the household earned $10,000, the tax would be less if $5,000 was assigned to each spouse rather than entirely to the spouse that earned it. In 1930, the Supreme Court ruled in Poe v. Seaborn that such income splitting was legal – but only in the eight states with “community property” laws (which provide that each spouse has a legal, one-half ownership interest in all property acquired after marriage). As a result of this legal disparity, other states subsequently enacted similar laws to allow their citizens the tax benefit of income splitting. Finally, in 1948, Congress passed new legislation creating the joint filing status nationwide, rendering the issue moot, and now taxpayers in all 50 states can file jointly.
To begin with, there wasn’t much of a distinction between filing as single and filing a separate return while married – in a joint return, you simply pooled your income and multiplied the tax brackets by two. Over time, as the tax code grew more complex, the joint filing status took on a life of its own, with its own set of parameters, definitions, and tax brackets – and along with that, the possibility that in some situations a joint return would lead to a marriage penalty instead of a bonus. This is certainly the case now in higher income brackets – for example, the 28% bracket begins at $146,400 for married filers, which is less than twice than that for single filers ($87,850.) As a result, we now have a “married filing separately” status which is distinct from the “single” filing status, and which prevents married couples from avoiding the marriage penalty by filing separate returns.
Despite the possibility of a penalty, joint tax returns generally provide tax relief, and they’re probably one of the biggest benefits that gay couples can now take advantage of (along with the estate tax exemption, which was at the center of the Supreme Court case). It’s a huge paperwork reduction as well – prior to the ruling, gay couples had to file a joint return at the state level but single returns at the federal level, which made figuring out things like deductibility of state tax from federal AGI and vice versa extraordinarily and needlessly complicated. It’s also likely that gay couples will be able to retroactively file amended joint returns, though the IRS has not provided any official guidance on this yet.