Why 2020 Weddings Could Have a “Marriage Tax Penalty”
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As many newlyweds find, there is much to share in a marriage.
Including your taxes.
If you’ve tied the knot this year (or planning to do so in December) it may be worth checking out what your new status means for your 2020 taxes. While many couples see their tax burden drop after marriage, some face a “marriage penalty” – that is, they pay more tax than if they had stayed unmarried and filed as a single taxpayer.
“In some cases, you can save money, and sometimes you can save money,” said certified financial planner and CPA Jeffrey Levine, director of forward planning at Buckingham Wealth Partners in Long Island, New York. “But it doesn’t cost as much as the wedding.”
In principle, the marriage penalty comes into play when the threshold values for tax brackets and deductions or credits are not twice as high as for individual applicants. For example, newlyweds sometimes find that a larger tax burden is an unfortunate side effect of marriage.
There are approximately 2.2 million marriages in a typical year. However, due to the pandemic, this could be much lower in 2020, according to surveys the Wedding Report conducted in March and June. If you’re among the 41% who say they’ve postponed the event for the next year, you have some time to figure out how that would affect your taxes.
However, for marriages this year, the couple must file their 2020 tax return next spring (April 15 is tax day). (Filing a separate tax return as a married couple rarely makes financial sense.)
Here’s what to know.
Higher income couples
For high earners, a higher tax burden can come from a variety of sources.
For 2020, the top tax rate of 37% is on taxable income of $ 518,400 for a single applicant. However, for married couples filing together, this rate applies to income of $ 622,050 and above.
“Except for the maximum rate, all tax brackets for married couples filing together are exactly twice that,” said Erica York, an economist with the Tax Foundation’s Center for Federal Tax Policy.
To illustrate, two people with an income of $ 500,000 each would pay the second highest tax rate of 35% if filing as a single taxpayer.
However, as a married couple with a combined income of $ 1 million, they would pay 37% to $ 377,950 of that (the difference between their income and the $ 622,050 threshold for the highest rate). That would mean paying about $ 7,760 more in income tax.
There are other provisions of the tax code that can often affect higher earners more severely when they get married. For example, while a person could have wages up to $ 200,000 before the Medicare 0.9% surcharge kicks in, the limit for married couples is $ 250,000.
Likewise, the income threshold for applying a capital gains tax of 3.8% will not be doubled. Singles with modified adjusted gross income greater than $ 200,000 pay the tax, while married couples filing together pay the tax if their income exceeds $ 250,000. (The tax applies to things like interest, dividends, capital gains, and rental or royalty fees.)
In addition, the limit on state and local tax deductions – also known as SALT – is not doubled for married couples. The $ 10,000 limit applies to both single applicants and married applicants. (Couples filing separately will each receive $ 5,000 for deduction). However, the deduction is only available to taxpayers who do a breakdown.
Low wage earners
For those with incomes at the other end of the income spectrum, a marriage penalty may result from the earned income tax credit.
The credit is generally available to working taxpayers with children, provided they meet income limits and other requirements. Some low-income earners without children are also eligible.
Because it is refundable – which means it can be refundable even if your tax burden is zero – it is considered valuable to working parents on low or modest incomes.
However, the income limits associated with the tax break are not doubled for married couples (see graphic).
Fifteen states also have a marriage penalty for taxpayers built into their marginal tax brackets, although this is more evident in some places than in others. For example, Maryland’s maximum rate of 5.75% applies to incomes over $ 250,000 for single applicants and over $ 300,000 for married couples.
Some states allow married couples to file separately on the same return so as not to face a penalty and loss of credit or exemptions.
“It’s a workaround for the penalty that would otherwise be incurred,” said York of the Tax Foundation.
Other notable things
If you are retired and already on Social Security, be aware that getting married can have additional tax implications.
For individual applicants, if the total of your Adjusted Gross Income, non-taxable interest, and half of your Social Security benefits is less than $ 25,000, you owe no tax on those benefits. However, for married couples filing a joint return, the threshold is $ 32,000 instead of double the amount for individuals.
Additionally, if you or your new spouse contributed to traditional or Roth individual retirement accounts in 2020, be careful about how much you’re investing in these IRAs. There are limits to deductions and contributions, and the income of both spouses feeds the equation.
The Tax Policy Center has a marriage calculator that you can use to enter the details of your and your partner’s financial life – wages, business income, children of dependents, etc. – to see how your taxes are doing Submission develop as a married couple.