An Updated Marriage Bonus and Penalty Calculator for Valentine’s Day
Love is blind, says the adage, and that can be a good thing when it comes to taxes. That’s because married couples often pay a marriage penalty—a higher federal income tax bill than they would if they were single. But for most couples, marriage means a lower tax bill—a marriage bonus in tax-speak.
Just in time for Valentine’s Day, the Tax Policy Center has updated its marriage bonus and penalty calculator to reflect the provisions of the American Taxpayer Relief Act of 2012 (ATRA), the new tax law Congress passed earlier this year. The new calculator lets you compare the tax bills of a couple filing as singles and as a couple for either the 2012 or 2013 tax year.
My TaxVox post about TPC’s original marriage bonus and penalty calculator explained why the tax code rewards some married couples and penalizes others so I won’t repeat all of that here. Instead I’ll discuss three tax provisions that will increase marriage penalties a lot in 2013 for many high-income couples.
1. ATRA’s new top tax rate: ATRA created a new 39.6 percent top tax bracket, which starts at $400,000 for single filers and $450,000 for couples filing jointly. Consider two people, each with $400,000 of taxable income. Unmarried, neither would hit the 39.6 percent rate. Married, they would pay the top rate on $350,000. That and other rate effects would impose a marriage penalty of more than $30,000.
2. Return of PEP and Pease: ATRA reinstated both the phaseout of personal exemptions (PEP) and the limitation on itemized deductions (Pease) that the 2001-2010 tax acts had eliminated. PEP takes away 2 percent of personal exemptions for each $2,500 (or part thereof) above a threshold—$250,000 of adjusted gross income (AGI) for singles and $300,000 for couples (both indexed for inflation going forward). PEP wouldn’t affect an unmarried couple in which each person has $250,000 of AGI but would take away all of their personal exemptions if they were married. That could increase their tax bill by more than $1,500 for each person in their family.
Pease reduces itemized deductions by 3 percent of AGI over the same thresholds that apply for PEP. It wouldn’t affect the unmarried couple with each person having $250,000 of AGI, but would raise their taxable income by up to $6,000 if they married, adding as much as $2,376 to their tax bill.
3. Obamacare Taxes: Two new taxes associated with the 2010 healthcare acts take effect in 2013: a 0.9 percent tax on earnings over unindexed thresholds—$200,000 for singles and $250,000 for couples—and a 3.8 percent tax on investment income over those thresholds. Two people earning $200,000 apiece would owe neither tax. If they marry, they would pay between $1,350 (if their income is all wages) and $5,700 (if it’s all investment income) in new taxes to support Obamacare.
The calculator makes it easy to determine these and other tax consequences of marriage in 2013. That’s not a very romantic activity, however, and, speaking as a happily married man, I suggest you find a better way to spend Valentine’s Day.