A New Marriage Penalty for High Earning Couples—and a Bonus for Some

By :: February 15th, 2013

Our new Marriage Bonus and Penalty calculator, despite all MBPC.smallits Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.

The culprit? The income thresholds for paying the tax. The new levy equals 0.9 percent of wages above unindexed thresholds—$200,000 for singles and $250,000 for married couples. Because the threshold for couples is less than double that for singles, the tax imposes a marriage penalty on couples with two high earners but gives a bonus to those with a high earner and a low- or non-earner.

Consider the simplest case of a penalty: each spouse earns $200,000. If they weren’t married, they wouldn’t owe the new tax because their separate earnings don’t exceed the singles threshold. As a married couple, their $400,000 combined earnings are $150,000 over the threshold for couples and they owe 0.9 percent of that in tax—$1,350.

The penalty stays the same if their earnings grow. As long as each has earnings above $200,000, they’ll pay $1,350 more each year. Marriage takes away $150,000 of the total exclusion the tax provides for two single workers.

Who are the lucky duckies for whom marriage will cut the tax? Couples with one spouse earning more than $200,000 and the other earning less than $50,000.

Consider again a simple case: a woman making $250,000 and her stay-at-home hubby. Unmarried, she owes the new tax on $50,000—$450. Married, that tax bill goes to zero. The savings derives from the $50,000 additional exemption that comes with marriage. That bonus shrinks if the husband starts working and goes away entirely if he makes more than $50,000.

It would be easy to get rid of those penalties and bonuses—just tax earnings separately for each worker the way we do with other payroll taxes. As long as the tax applies to a couple’s total earnings, there have to be either bonuses or penalties or both.

2Comments

  1. Michael Bindner  ::  5:39 pm on February 15th, 2013:

    It would be even easier to shift from income and payroll taxes to either a Value Added Tax or a VAT-like Net Business Receipts Tax (which is a VAT with offsets to employers for such things as education and training, health care or insurance (including self-insurance), an expanded refundable child credit paid with wages and any other social service to be transferred (either optionally or fully) from government operation to employer operation. Any remaining income surtax tax on high income earners or heirs would be set with rates high enough to account for the fact that in the short term, the wealthy save some of their income. As to the topic, it is no longer up to the couple to track who is paying taxes, unless of course they pay the high income surtax. Whether the single filer tax brackets and exemptions are half the joint filer brackets, etc., is up to Congress. My plan has them so, but an argument can be made for saying at some point, rich is rich and it does not matter who brings the money in. $400,000 a year may be rich, but probably only if it is consistent for a period of years. Some only get that amount when they cash out an asset. For this reason, only distributions from the asset sale should be taxed so that small business owners (like my cousin who operates his wife’s farm) don’t get hit if he sells due to drought.

  2. Tax Roundup, 2/18/2013: Your tax dollars at work for Rockwell-Collins. « Roth & Company, P.C  ::  8:53 am on February 18th, 2013:

    […] Roberton Williams, A New Marriage Penalty for High Earning Couples—and a Bonus for Some (TaxVox): […]