The Marriage Penalty Tax

The gifts have been unwrapped, the photos memorializing the blessed event figure prominently in your decor, and you experience an odd thrill at checking the box marked "married, filing jointly". Unfortunately, this enthusiasm soon fades as you comprehend the diminishment of your refund. Or worse yet, you actually owe the government money. "How did that happen?", you wonder with dismay. The answer is simple - you got married. The federal tax code of this country was established to assess "household" income, regardless of whether the household contains one person or an entire family. When you and your new spouse signed the marriage license, your separate tax identities merged into one. For example, if you and your husband both earned $25,000 last year and you file jointly, you will owe 8494.50 in taxes, versus $7500 if you file as two single unmarried individuals (http://cwfa.org/action/marriage-tax.shtml will calculate this discrepancy tax for you.). Although not every married couple is adversely affected by this arrangement, the Congressional Budget Office has estimated that 20 million couples are paying higher taxes by being married. Specifically, in 1996, the CBO calculated that more than 40% of married couples paid penalties averaging $1380 per couple. When the modern income tax system began in 1913, married couples filed separately if both partners had income. In community property states, married couples had the advantage because they could split their property as if both had earned exactly half. In 1948, the tax code changed so that all states allowed "income splitting", which did nothing for couples where both partners earned approximately the same amount. However, in most cases, one partner earned drastically more than the other, and these couples were capable to saving up to 42% by utilizing this option. This ample marriage bonus was addressed in the tax code change of 1969, resulting in a shuffling of tax rates and brackets. This began the present trend of marriage penalties, and although the reduction of tax rates in 1981 and 1986 alleviated some of these burdens, the increase of tax rates in 1993 served to aggravate an already unfair situation. The root of the marriage penalty lies in three conflicting principles of tax fairness; equal treatment of married couples with equal income, tax neutrality in regards to marital status, and progressive taxation of household income. Here is one example of the conflict:

The Millers and the Smiths both have a household income of $75,000. According to the principle of equal tax treatment, they should both owe the same amount, and according to the tax neutrality principle, it shouldn't matter if the Millers' are a married couple earning $75,000 and the Smiths are two single people each earning $37,500. However, when the principle of progressivity is applied, the Millers are considered one household and are taxed at a higher rate then the Smith's two household incomes of $37,500. Plus, the standard deduction for the married Millers is lower then the combined standard deductions for two Smiths.

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