The Marriage Penalty and Itemizing Taxes

signing tax formOne of the lovely conversations about money I had over winter break was with my mother-in-law one morning while we were cooking breakfast.  I had probably brought up the fiscal cliff or something similar, and the conversation wound up with me blurting out “Do you know how little money we make?”  Oops!

 

She was surprised to learn some details about our tax situation, but it makes sense that we have different impressions of the tax code from the vantage points of very disparate marginal tax brackets.  It’s probably been a number of decades since Kyle’s parents’ household income was down around where ours is now!

 

The two disagreements we had were over whether it’s beneficial tax-wise to be married and why Kyle and I don’t itemize our deductions.

 

The Marriage Penalty

 

My MIL repeated what I hear often – that married couples experience tax breaks over their single counterparts.  I have thought long and hard about any financial benefits we have received from getting married and knew that we paid exactly the same in taxes whether we were married or not.  In fact the marriage penalty had been in the news recently, so I wasn’t sure at all why my MIL and so many others thought that there were tax benefits for being married!

 

I looked it up in more detail later, and it turns out that depending on the income of the two individuals there is potential for either a tax penalty or a tax bonus.  The people who get bonuses for being married are high-earners with very disparate incomes.  Median and lower earners and couples with relatively equal incomes either pay exactly the same tax as singles or are penalized.

 

I think this document sums up how the penalties and bonuses come about: “Marriage penalties generally arise because the standard deduction and rate brackets for joint filers are less than twice the corresponding amounts for single filers or head of household filers.  Marriage bonuses generally arise because joint filing effectively allows couples to average their incomes, which can reduce the tax rate, and therefore the tax, on the income of the higher-earning spouse.” (Note that right now the standard deduction for a married couple is exactly twice that for a single person, as updated by the Taxpayer Relief Act of 2012.)

 

Since Kyle and I both earn a relatively low but equal income (combining for a median salary), our tax due is exactly the same as if we were not married.  But it’s certainly possible that at times Kyle’s parents could have experienced a bonus for being married, depending on how different their incomes were and how the tax code has changed over the years, so it’s reasonable that we had different views on the tax benefits of being married.

 

Itemizing Deductions

 

My MIL was surprised to learn that Kyle and I have nearly always taken the standard deduction instead of itemizing our deductions.  She knows that we tithe so she assumed that our giving would, combined with our other eligible deductions, put us over the standard deduction level.  This was the part of our conversation where I made my uncouth statement!  I could have rephrased it as, “Do you know how high the standard deduction is?”

 

Kyle and I give a bit above 10% of our income, but not all of it is to eligible institutions, so I’ll just assume that we could deduct only our tithe.  Our income in 2012 was around $54,000 so let’s say we gave about $5,400The standard deduction for a married couple is a whopping $11,900!

 

There are several other common deductions that other people can take, but they don’t apply to us right now.

  • mortgage interest – we don’t have a mortgage
  • medical expenses over 7.5% of AGI – we have next to no medical expenses
  • non-reimbursed job-related expenses/educational expenses – we don’t have to pay out of pocket for anything school/work-related
  • state taxes (income, property, sales) – we only pay a few thousand in state income taxes, not enough push us over
  • student loan interest – we aren’t making any student loan payments now and plan to never pay interest on our outstanding loans

 

Kyle and I would have to give around 15-20% of our income to make itemizing worth it, given that our only other appreciable source of deductions is our state income tax.  I am very grateful for the standard deduction being set so high (though I have no idea why it is)!

 

Are you paying a marriage penalty, getting a marriage bonus, or neither?  Do you itemize your deductions? If your biggest deduction were not applicable, would you still?

 

photo from Free Digital Photos

 

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46 Responses to "The Marriage Penalty and Itemizing Taxes"

  1. I think it depends on where you live as in Australia there are plenty of different tax breaks and concessions to families over a single person.
    Glen @ Monster Piggy Bank recently posted..How Much Does it Cost to Have a Baby?

    1. Emily says:

      This was definitely a US-specific post! What kinds of benefits do you receive for being married?

  2. Ross says:

    Since I’m single, I always viewed it as a marriage benefit. If I married someone who made much less than I did, our total tax burden would be reduced. But you bring up a great point that I didn’t fully understand before. I still think it would be fairer if everyone just paid taxes on what they made… but I’m sure there’s a good reason we don’t do that.
    Ross recently posted..Frugal February Challenge: Affording the Chicago Marathon

    1. Emily says:

      I would actually say it’s pretty rare to experience a bonus right now – from the tables I looked at, you have to fall near the top of a couple of the marginal tax brackets, and if you happen to earn more and fall at the bottom of the next one up you would experience a penalty. It’s weird.

      The government used to incentivize having single-earner households, and then tried to un-incentivize it… I agree with you that we should just pay the same rates whether married or single. There are already credits and deductions for having kids and isn’t that what matters more now, not how many earners are in the marriage?

    2. They can’t 1. treat individuals the same and 2. treat family units the same and 3. have a progressive tax system. One or two of those is always going to have to go mechanically. It’s an iron law. Some countries do just have individual taxes instead of family-based taxes.
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  3. Leigh says:

    I don’t understand why marital status affects how much income tax a person pays. It kind of makes me prefer to just stay maritally single since at least I know what I’m getting every year with that.

    I’ll itemize for 2012 for the first year! My yearly property taxes, the tax portion of my vehicle tab renewal, state sales/income tax, and charitable donations don’t add up to the standard deduction, so as I pay down the mortgage aggressively, it’ll make less and less sense to itemize each year. Right now, I estimate that I’ll only itemize for 3 more years after 2012, but I guess we’ll see how things play out!

    So many people don’t get that the mortgage interest deduction only comes into play if you are paying enough interest to bump yourself over the standard deduction, which if you’re married, won’t necessarily happen unless you have some combination of a) a large mortgage or b) a high interest rate.
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    1. Emily says:

      There are big benefits to being legally married when you die! It’s just not something that affects things year-in and year-out.

      It’s sort of exciting to itemize, although a pain. Do it while you can! Maybe in a few years there will be reason to itemize again.

      Something I learned during all the news coverage of the fiscal cliff was that most mortgage-holders don’t pay enough in interest to make the itemizing worthwhile, so the mortgage interest deduction really only helps people who have huge mortgages – upper class and upper middle class, for the most part. So getting rid of the mortgage interest deduction doesn’t really hurt the middle class and lower class, generally speaking, as it has been argued.

      1. Oh I love when people say that we are married and should get a mortgage because we will be able to itemize our taxes.
        In order to even beat the standard deduction with our mortgage interest, we will have to buy a house 2x what we are comfortable paying…and I wonder why people are in over their heads.
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        1. Emily says:

          People get really crazy for the mortgage interest deduction but it makes no sense!

  4. Our combined tithe, mortgage interest and taxes put us over the limit so we itemize. In coming years I suspect we won’t hit the limit and we’ll change to the standard deduction.
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    1. Emily says:

      I’m so glad the standard deduction exists for this reason, but I don’t understand it!

  5. We itemize, but that is largely due to the fact that we run our own business. We have a lot of things that we can benefit from writing off, so it makes sense for us to itemize when you add it to our tithing and mortgage interest. If we did not have that, it would be hard to justify the itemizing. In terms of the marriage penalty, I am not certain that it works out to a bonus for many.
    John S @ Frugal Rules recently posted..5 Easy Ways to Save Money Lost Due to the Payroll Tax Increase

    1. Emily says:

      If I understand correctly, the reason you itemize for your business is because you are a sole proprietor? Can people who work at home but don’t run their own business also deduct a fraction of utilities and so forth, or is that just for business owners?

      I agree, there are probably only marriage bonuses when one person doesn’t have any income – sometimes.

      1. You know, that’s a great question Emily. This is part of the very reason why we hired a CPA…to know these things for us. I had always done our own taxes prior to starting our business, but hired him as there were just too many moving parts for me to comfortably handle. I would imagine that there are people out there who do claim I even if it is not a business.
        John S @ Frugal Rules recently posted..A Man’s Credit: Taking Responsibilty of Your Financial Life

        1. Emily says:

          Individual taxes are fairly easy but I think once you become self-employed to some extent it gets really complicated. I would probably hire a CPA, too. It’s worth it to outsource that work than take the time to study everything yourself and risk making a mistake.

  6. I want to say, “Good job, you got it all right!” because you did. 100%. That’s exactly what’s going on both with the marriage penalty/reward and with itemization. (I teach this topic in one of my classes). I hope that doesn’t sound patronizing though!
    nicoleandmaggie recently posted..Ponderings on perfection

    1. Emily says:

      Thanks for the verification!

  7. I don’t itemize, and I feel like the standard deduction went up! I give a lot of my income away, just not over $5K of it. I’ve always seen the marriage benefit as an income thing, not an income tax thing.
    Kathleen, Frugal Portland recently posted..If not online dating, then where do you meet people?

    1. Emily says:

      I think the standard deduction does go up incrementally every year.

      Why would marriage help your income? I guess married men do make more money, statistically, but that’s not necessarily directly from being married.

      1. The only way marriage wouldn’t help my income is if I marry someone in the poorhouse.
        Kathleen @ Frugal Portland recently posted..If not online dating, then where do you meet people?

        1. Emily says:

          I guess that is true – but your expenses will increase, too!

  8. Sophie says:

    My understanding (and I could be wrong) is that in Australia, you won’t receive any benefits/penalties for being married. Some couples do still get married “for tax purposes” here, but what they mean is that they’re eligible for government student allowances once they’re married that they wouldn’t be otherwise – so it basically qualifies you for welfare. Such a bad reason to get married!

    Once you have kids, however, the government starts throwing all kinds of benefits your way to offset the costs. And those apply if you’re a low or middle income earner. I know plenty of families earning $250k a year or more and still receiving child-related benefits. Which I think is really wrong, but that’s a separate issue.
    Sophie recently posted..Product Road Test: Easiyo Yoghurt Maker

    1. Emily says:

      Ok so it’s more about families than marriage. Does legal marriage make inheritance a lot easier/untaxed like it does here?

      1. Sophie says:

        Not really – our government assumes you’re effectively married as soon as you’ve been living together for two years (you can even attempt to claim each other’s assets in the event of a separation!!). So I believe (and again I could be wrong) that there are no inheritance benefits to being married as opposed to just living together. One benefit is that after two years of marriage, you can add your spouse to the title of your house without any of the usual fees involved. So that’s cool.

        Australia is largely atheist/agnostic, and it’s by far the norm here for couples to live together before marriage and to marry later (late 20s at the earliest for most people) so that could be why there are no marriage tax benefits. Governments will typically reward the behaviour they want to see, right?
        Sophie recently posted..Product Road Test: Easiyo Yoghurt Maker

        1. Emily says:

          Theoretically I suppose, but in practice I can think of many counterexamples!

  9. I haven’t found any difference between being married or not (although we do pay more tax overall now… since we make more than we did years ago). Our incomes are pretty comparable though. I’m sure if I was a stay-at-home mom – and my husband was able to contribute to a spousal RRSP (and deduct it on his income taxes), then we’d benefit from being married.

    1. Emily says:

      It is nice that non-working spouses can contribute to tax-advantaged retirement accounts – that’s a good benefit.

  10. Thanks for sharing this advice. It all depends on what country you are from though.
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    1. Emily says:

      Definitely only applies to the US! I show my bias!

  11. AverageJoe says:

    Ha! I’ve never thought of the marriage penalty as a benefit. It’s so often been lower that I just thought it’s the price of true, true love… ;-)
    AverageJoe recently posted..How to Cut Your 2012 Tax Bill Today

    1. Emily says:

      Only a select few can have true love AND lower taxes… The single-earner households, most likely.

  12. We have always itemized because of all of my business expenses. I don’t think the small salary my husband makes as a teacher does much to our taxes at all. After my business finally sells, I don’t know if we will have enough deductions to itemize or not. I’m still trying to figure out how the taxes on our rental property will come into play. With low interest mortgages, our interest is way down,but I wouldn’t want to have a higher rate just to get to itemize.
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    1. Emily says:

      Sounds like you have a lot of moving parts! Do you do your own taxes?

  13. My wife makes about 50% more than I do. I don’t see how combining a high income with a low income is a benefit because you aren’t taxed on the average of your income, but the total of it! The way I see it, by being married, my entire income is now effectively being taxed in the 15% bracket because we covered the lower brackets with my wife’s income.

    My parents had a similar problem before my mother had to retire for health reasons. She only made minimum wage and basically all of it was taxed at 25%. Combined with all of the other taxes, plus gas, At the end of the day, she was almost a volunteer,
    Edward Antrobus recently posted..Using Dedicated Income Streams for Debt Payments

    1. Emily says:

      I don’t think you have the situation quite right in your mind, especially for the lower tax brackets. The married couple tax brackets are somewhere between 1 to 2 times what they are for single people (at lower incomes, 2x or close). So while you could say that all your income is being taxed at 15%, you would have to say that a great portion of your wife’s income that would have been taxed at 15% or 10% has been bumped lower.

      Alternatively, just compare the single-person tax bracket edges with the married-filing-separately edges. They don’t start to deviate until you make about $75k per person.

      But for people who are already married and are making the decision to bring in some extra income or not, certainly there could be enough additional costs to offset any gain, like daycare, travel, and attire.

      1. I’ve done the math; there is a $300 difference in tax burden between single and married filing for us. That works out to about 4%
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  19. Lucas says:

    We are getting a break becuase of exactly what you mentioned – My income was much higher then my wifes. And especially now that she is at home with our 3 kids we are paying a lot less in taxes then we were before. Each kid alone is about $2k less federal taxes (personal exemption at 25% plus $1000 child tax credit). So that coupled with the higher braket amounts is roughly $8000 less in federal taxes (maybe $1000 less in state taxes).

    1. Emily says:

      Sounds like a good deal for you guys – especially the kids part!

  20. Getting married has many benefits (-_-).If the taxpaying spouses have substantially different salaries, the lower one can pull the higher one down into a lower bracket, reducing their overall taxes.

    ~~So far I know that “No marriage penalty at lower incomes, but Marriage penalty at higher incomes”

    @ Emily ,
    The marriage penalty can be even worse in cases where one spouse is not a citizen or a US resident. What do you think about this issue?

    Another thing,

    If a couple got married on Dec, 31 in a particular year; How does determine taxes for that couple? ( so far i know that they have to pay for the entire year!!!! )
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    1. Emily says:

      I haven’t thought about taxes for married couples when one is not a citizen or resident – no one’s ever asked me about it before! Even in the tax resource I’m helping to prepare for students at my university we are only speaking to domestic students, unfortunately. It’s complex because the tax treaties are country-specific, as I understand.

      Yes, you are considered married tax-wise for the whole year in which you get married.

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