For years, one of the hottest political issues was the "marriage tax penalty" and some of the overheated rhetoric made it sound like the Congress and the IRS favor "living in sin" over "matrimonial bliss." Nothing could be further from the truth. Over the years, Congress has packed the tax law with provisions favoring families. And, in the 2003 tax cut, the lawmakers finally delivered on long-promised relief. First, take a look at the issue:
Yes, it is true that some married couples pay more tax on a joint return than they would if husband and wife were still single and each filed his and her own return.
The reason is simple to understand, if not to accept. On a joint return, a husband’s and wife’s income are combined. Since our graduated tax system applies higher tax rates to higher incomes – under the theory that the more you earn, the more you can afford to pay – your combined income can be nudged up into a higher tax bracket. This is so even though the tax brackets are wider for joint returns than for single returns. The extra tax you pay on a joint return, compared to the combined bill if you and your spouse were filing individual returns, is the marriage tax penalty.
The Marriage Bonus
Moving from single filing status to a joint return doesn’t always work to your disadvantage. Assume, for example, that one of the betrothed has a taxable income of $75,000 and the other has no income at all. On a single 2006 return, the breadwinner would owe a tax of $15,339. Marriage to a non-earning spouse would slash that bill. On a joint 2006 return, the tax on $75,000 of taxable income would be $11,871, for a marriage bonus of $3,468.
Marriage Penalty Relief
To relieve the marriage tax penalty (and increase the marriage tax bonus for those who enjoy it) Congress has widened the 15% bracket on joint returns so that it now holds exactly twice as much taxable income as the 15% bracket as it is for single returns. (There will still be a disparity for higher tax brackets; for example, the top of the 25% and higher brackets for joint returns is not twice as high as for single returns.)
The lawmakers also eliminated another cause of the marriage tax penalty: the fact that the standard deduction for married couples was not twice as big as the standard deduction for singles. Before the law change, for example, the 2003 standard deduction for single returns was $4,750, while on joint returns it was $7,950. Under the new law, the standard deduction for 2006 joint returns is $10,300 — exactly twice than on single returns.
While the changes go a long way toward relieving the marriage penalty, there's even better news: The changes help all married couples — even the 20 million or so who have been receiving a marriage bonus. That bonus is even bigger now. (Just don't tell the single people.)