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Leslie F. Seidman, FASB Chair

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Leslie F. Seidman, FASB Chair www.cpaj.com December 2011 FASB Looks to the Future Leslie F. Seidman, FASB Chair Annual Tax Update •Marriage and Taxes •Estate Tax Portability •Tax Preferences for Education T AXATION federal taxation 20 Questions on Marriage and Taxes Penalties and Bonuses for Filing Status By Thomas Tribunella, Heidi Tribunella, and Laurie Phelps t has been widely reported that President George W. Bush’s sections of the IRC that create these penalties or benefits, and dis- tax cuts—enacted in the Economic Growth and Tax Relief cuss the implications of a tax code that rewards some marriages Reconciliation Act of 2001 and the Jobs and Growth Tax Relief while penalizing others. IReconciliation Act of 2003—were attempts to remove the so- called marriage penalty from the Internal Revenue Code (IRC). 1. Why Is the Marriage Penalty an Important Issue? Although this certainly seemed a laudable goal, a review of the In 2007, there were approximately 112.4 million households in current tax code shows that the marriage penalty, alive and well the United States, according to the U.S. Census Bureau. Married throughout the code, continues to impact high-, middle-, and low- couples occupied half (55.9 million) of those households. In about income couples. 62% of married families, both spouses participate in the work- The following 20 questions summarize the factors that affect force. The Congressional Budget Office estimates that the mar- the marriage penalty or marriage bonus, examine the different riage penalty affects 43% of all married couples. 38 DECEMBER 2011 / THE CPA JOURNAL 2. What Is a Marriage Penalty therefore, receives the benefit of a lower there is a great difference in spouses’ respec- (or Bonus)? tax bracket. tive incomes. Consider a CEO who has tax- There is no explicit marriage penalty tax able income of $200,000 per year but whose in the IRC, nor is there a line on any tax 4. Is the Marriage Penalty Affected spouse earns only $5,000 in taxable income form for such a penalty. The marriage by Tax Rate Schedules? per year. If the CEO were single, he would penalty occurs because some sections of The progressive income tax system be in the 33% tax bracket. But because he the IRC create differences in the tax lia- currently used in the United States increas- is married, the couple’s joint taxable income bility of a married filing jointly (MFJ) cou- es the marginal tax rate applicable to the ends up in the 28% bracket. In 2011, the ple and the combined tax of two single fil- combined income of married couples. married couple would owe $45,469.50 in ers. For the purposes of this article, a The tax rate schedules are set forth in federal taxes. If each had filed as a single marriage penalty or, conversely, a bonus, IRC section 1(a). When both spouses individual, the two would owe a combined is defined as the difference in federal tax generate income, they get pushed into a amount of $51,397. This results in a liability between a couple choosing MFJ higher tax bracket, and are thus taxed at a $5,927.50 marriage bonus. and what the couple would owe in a higher rate. combined filing as two single persons. A For a marriage-neutral tax code, the 5. Can the Marriage Penalty couple may experience a marriage penal- income level at which higher tax rates take Be Avoided by Filing Separately? ty or bonus depending upon their earnings, effect for MFJ couples should be twice the In general, a married couple cannot credits, and deductions. income level that applies to single indi- avoid the marriage penalty by filing as mar- viduals. The tax code is marriage-neutral ried filing separately (MFS). In fact, filing 3. What Is the Typical Cause of a for taxpayers in the lowest two tax brack- as MFS may actually increase their tax lia- Marriage Penalty (or Bonus)? ets, but the penalty is introduced by the bility. Yet, the MFS status may result in a Once a couple is married, the spouses rates for higher earning couples. For exam- lower combined tax for a couple than if are entitled to file a joint income tax return. ple, in 2011, the top tax rate for both they choose MFJ. This can happen when While this simplifies the filing process, they individuals and married couples takes effect there is a disparity (the greater the dispar- may find that their tax liability ends up when income reaches $379,150. In order ity, the more pronounced the effect) in either higher or lower than their com- for there to be no marriage penalty, the top the spouses’ respective incomes and the bined liability would have been if each had tax rate for MFJ should be $758,300, but spouse with the lower income has deduc- filed singly. it is not. Currently, a married couple in tions that are subject to an adjusted gross Higher taxes are most likely due to the which each spouse has taxable income of income (AGI) percentage limitation that combining of income on a joint return; $379,150 will owe $15,244 more in taxes would be lost if they choose MFJ. when both spouses file jointly, more of when filing jointly (marriage penalty) their income is taxed at a higher marginal because the income levels presently 6. How Is the Marriage Penalty Affect- rate, but their allowable deductions have incorporated in the tax rate schedules are ed by the Standard Deduction? not increased twofold. As a result, they less than twice the level for single filers. The standard deduction amounts are move into a higher tax bracket, and this For taxpayers at the lower rates (10% marriage-neutral, as the MFJ amounts are result is referred to as the “marriage tax and 15% tax brackets), no marriage exactly double the single amounts. The Tax penalty.” One example of a marriage penal- penalty exists, as tax bracket amounts for Relief, Unemployment Insurance ty is the tax rate schedule, as demonstrat- MFJ are exactly double the single amounts. Reauthorization, and Job Creation Act of ed later in question 4; although the sched- Congress did adjust these tax brackets for 2010 extended these amounts for two ule in and of itself is not a direct example the purpose of alleviating the effect of the years. (See question 15 for other items that of the penalty, it can cause the penalty. marriage penalty on lower income fami- are marriage neutral.) Some of the income levels for a given tax lies. As a result, the marriage penalty The additional standard deduction cre- bracket of MFJ taxpayers on the tax rate associated with the tax rates begins with a ates a marriage penalty item within IRC schedules are less than twice the income married couple who have $139,352 in section 63(c)(1). The additional standard levels for single taxpayers. This means that combined taxable income, with each deduction is available for taxpayers who MFJ taxpayers will owe more income tax spouse earning exactly half of the are over 65 years old or are blind. A tax- liability than they would have as two sin- income. This couple will incur a marriage payer who is both blind and over 65 gle taxpayers. penalty of six cents. Although this penal- years old is entitled to two additional In some circumstances, however, mar- ty starts low, it increases quickly as income standard deductions. This amount is in ried taxpayers enjoy tax advantages. When rises. A married couple with $160,000 of addition to the basic standard deduction taxes are lower for married couples, it is taxable income earned equally by each and benefits taxpayers who do not item- referred to as the “marriage tax bonus.” A spouse faces a $620 marriage penalty from ize their deductions. For single taxpayers, marriage bonus occurs when there is a the tax rate schedule alone because $20,650 the amount is $1,450; however, if the tax- great difference in the respective incomes of the income is taxed at the 28% brack- payer is married, the additional standard of two spouses. High-income individuals et instead of the 25% bracket. amount is reduced to $1,150. This $300 can average their income with that of a Tax rate schedules can also lead to a mar- reduction can result in a marriage penalty lower income spouse, and the MFJ couple, riage bonus. This generally occurs when of $30 to $105, depending upon the DECEMBER 2011 / THE CPA JOURNAL 39 marginal rate, for each additional deduc- Married, she would only be allowed an exemptions are allowed for AMT purposes tion allowed due to age or blindness. itemized deduction of $600 ($3,000 − under IRC section 56(b)(1)(E). [$120,000 × 2%]). (It is assumed in both 7. How Is the Marriage Penalty cases that there are other deductions 9. Does the Marriage Penalty Increase Affected by Phaseouts? that would cause the taxpayers to item- for High-Income Couples? There are several provisions in the tax ize rather than take the standard deduc- Until 2009, there was a limitation of code where tax liability is affected by tion.) Married couples in this situation certain itemized deductions for high-income phaseouts of deductions and credits, the might want to consider filing separate- taxpayers under IRC section 68. This limi- range of which varies depending upon ly, but they first need to carefully tation reduced itemized deductions by the whether a taxpayer is married or single. consider the other tax consequences of lesser of 3% of the amount of AGI that Many of these provisions require married filing independently.
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