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Update: A new bill will extend the marriage tax penalty relief for most people. Stay tuned for additional details from the Fiscal Cliff Deal in process.
The marriage tax penalty was set to make a comeback in 2011. Congress passed the tax deal to extend the tax rates. Included in the tax deal was an extension on the elimination of the marriage tax penalty for two more years. The marriage tax penalty is now scheduled to return in 2013.
Let’s take a look at the marriage tax penalty, an often confusing and overused term, to see what it really means and why it’s coming back.
Ten years ago, married couples had to pay more than double the taxes they would if they were two single filers. Owing more tax as soon as you married became known as the marriage tax penalty.
The culprits of the marriage tax penalty were standard deductions and tax brackets that were only larger than, but not double, the single deductions and brackets.
When the 2001 Bush tax cuts were put in place, the marriage penalty tax was eliminated for most taxpayers by doubling the single standard deduction for married taxpayers. The tax brackets were also aligned accordingly, so there wouldn’t be any additional taxes just for getting married.
The amount of tax differences will vary based on your situation. You can use the tax calculator to try to predict how it will impact your family. To use it as a marriage penalty calculator, fill it out twice, once as single and once as married to see the differences.
Those taking the biggest hit will be couples with one large income and one smaller income. Right now, couples with very different incomes often see a marriage tax benefit, sometimes called a marriage tax credit, under the current rules.
The marriage tax penalty is different than married filing separate, which is a popular way to file in some states. For example, in Ohio, it’s often beneficial for spouses to use the filing status married filing separate rather than to file joint as they have more tax savings.
When I do a tax return, I always run it both ways, joint and separate, to see which method will have the biggest tax savings.
If the marriage tax penalty returns, we’ll probably see some changes to the most beneficial filing status too, which will be something to keep in mind if you often file separately.
Now even if the marriage tax penalty returns, I’m not going to recommend divorces across the board. If you are like me, the benefits of family health insurance will more than outweigh the costs of the tax increase. But I will be putting on my thinking cap to try to get creative and maximize our tax savings with the new rules!
And of course, Congress will be encouraged to make a decision on the expiring tax cuts and marriage penalty relief, just as they are every year… so we’ll have to wait and see what happens.
To see if you have a marriage tax penalty, use the tax policy calculator: Marriage Bonus and Penalty Tax Calculator.