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Tax Bill Tackles "Marriage Penalty," But Wedded Bliss Is A Complex Tax Equation, Says CCH
(RIVERWOODS, August 9, 1999) – The public has been hearing a lot about "the marriage penalty" as tax cuts in the Republican-sponsored tax bill approved by Congress on August 6 are hotly debated, but the cost of marriage discussion will continue even after the promised Presidential veto, according to CCH INCORPORATED (CCH), a leading provider of tax and business law information and software. While both parties denounce this artifact of the tax system, and both have suggested remedies, few taxpayers realize the full extent of the multiple penalties – and bonuses – for the married state that exist in the nation’s tax laws.
Mark Luscombe, an attorney, CPA and principal federal tax analyst for CCH, calculates that over 60 provisions of the Internal Revenue Code can help or harm married couples, as opposed to two similarly-situated, but unmarried taxpayers.
"The bill that just passed only addresses four provisions. That still leaves many tax ramifications to be considered whenever a couple ties the knot," Luscombe said.
Two Common "Penalties"
The "marriage penalties" that are most often identified arise from two sources. First, the standard deduction allowed on a joint return is less than twice the amount of the standard deduction for single filers.
Second, a couple can move into a higher tax bracket when their incomes are combined on their joint return. Add together two incomes that each might be taxed at 15 percent and you can get a joint income taxed at 28 percent, and two incomes taxed at 28 percent individually might be taxed at 31 percent.
Suppose that Bob and Betty each have adjusted gross incomes of $32,050. Filing singly, each is entitled to a personal exemption of $2,750 and a standard deduction of $4,300, so each has a taxable income of $25,000. This falls just within the 15 percent bracket ($25,750 in 1999), so each pays income tax of $3,750. If the tax laws were marriage-neutral, their tax after they tied the knot would be twice that amount, or $7,500. But that’s not how things work under current law.
Filing jointly, Bob and Betty report adjusted gross income of $64,100. They take two personal exemptions, which total $5,500, but instead of a standard deduction of $8,600 (twice $4,300) they are allowed only $7,200 on their joint return. This gives them a taxable income of $51,400. The 15 percent tax bracket for joint filers tops out at $43,050 in 1999, so $8,350 of their joint income is taxed at 28 percent, leading to a total tax bill of $8,796 – a marriage penalty of $1,296.
It’s important to note, though, that it is the distribution of income – 50/50 between the two spouses – that produces the penalty. If Betty is a professional with an adjusted gross income of $64,100, she could reduce her income tax by $3,831 by marrying someone who is penniless.
A Range of Relief
Under the Republican bill, relief comes in stages, and each stage is phased in over a number of years. The first stage addresses the standard deduction. Beginning in 2001, the standard deduction for joint filers becomes a larger and larger multiple of the single-filer deduction, until it becomes twice as large in 2005. This will not make a dramatic difference for our hypothetical couple, though. Assuming that the change was accelerated and the standard deduction was doubled for their 1999 return, they would save only $392 in taxes.
The bill provides a second form of relief by gradually widening the lowest tax bracket for joint filers until it is twice the amount as that for single taxpayers. This would begin in 2005 and be completed in 2008. The Bobs and Betties of the world would see their current marriage penalties resulting from the tax rate structure completely wiped out by this date, and a rate reduction – from 15 percent to 14 percent for the lowest bracket – would further lighten their tax burden.
As Bob’s and Betty’s economic fortunes improved, though, they would find the marriage penalty creeping back onto their returns. The bill has no provision for adjusting joint return rates beyond the 15 percent bracket.
Other Changes Benefit Low, High Earners
The bill does contain another form of relief for married taxpayers at the low end of the income spectrum. A change in the way that the Earned Income Credit is calculated would make more married couples eligible for the credit, and increase its amount, lessening what is now a marriage penalty.
One provision of the bill provides some marriage penalty relief at the higher end of the income spectrum. Under present law, the income eligibility limit for conversions of regular IRAs to Roth IRAs is adjusted gross income of $100,000 for both single and joint files – a clear marriage penalty. The bill would double the income limit for joint filers to $200,000.
Other Penalties, Bonuses, Unchanged
Attacks on "the" marriage penalty make for popular discussion, even if they gloss over the complex workings of the tax code. Democrats as well as Republicans have put forward proposals to lessen, if not eliminate, some of the more obvious disparities that affect married couples, so if the current tax debate eventually results in a compromise tax bill enacted by Congress and signed into law by the President, it may well contain some kind of marriage penalty relief targeted at lower-income taxpayers.
But dozens of provisions of the tax laws would remain that can produce pluses or minuses for couples as opposed to singles.
The credit for the elderly, general business credit, the alternative minimum tax, the taxation of social security benefits, the phaseout of personal exemptions – all can produce either a penalty or a bonus, depending on whether the incomes of the two spouses are relatively equal or unequal.
Other provisions are much more likely to produce a bonus, with little likelihood of a penalty, for married taxpayers. For example, Bob and Betty can each exclude $250,000 in gain on the sale of a personal residence as singles. As a married couple, they can exclude up to $500,000 in gain, even if the house is in only one of their names.
"Some might say that there is a ‘singles penalty’ in some of these provisions," Luscombe noted.
With capital gains and losses, the picture becomes more complicated. A married couple can deduct only $3,000 in capital losses on a joint return, the same amount that each could claim filing singly. On the other hand, Bob can offset his gains in the stock market with Betty’s losses, a provision that can lead to enormous savings.
"It all depends on who owned what, but one thing that’s very likely is that there is some disparity between joint and single filing," said Luscombe.
Is Neutrality a Goal?
Luscombe points out that there is no consistent tax policy that drives the decisions of lawmakers. For example, he cites major provisions of the Taxpayer Relief Act of 1997. The child tax credit can produce a bonus, while eligibility for Roth IRAs and the limits on contributions to deductible IRAs all can produce a bonus or a penalty. The Hope and Lifetime Learning credits can produce bonuses, education IRAs and the deductibility of student loan interest can produce penalties or bonuses.
"It doesn’t seem that Congress has been scrupulously marriage-neutral in crafting recent tax laws," Luscombe concludes. "If there is a compromise bill at the end of the road, some relief from some marriage penalties might well be a part of it, but we won’t see a truly neutral tax code anytime soon."
About CCH INCORPORATED
CCH INCORPORATED, founded in 1913, has served four generations of business professionals and their clients. The company produces approximately 700 print and electronic products for tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com.
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