The marriage tax penalty post-TCJA

The U.S. federal tax system has featured some form of higher income taxes for dual-earner married couples than for two unmarried persons since 1913; this is commonly referred to as the marriage tax penalty. Similar to prior tax reforms, the law known as the Tax Cuts and Jobs Act (TCJA)¹ preserved the penalty for marriage, reducing some components and creating some new concerns.

This article explores the current state of the marriage tax penalty, identifying some important sources and their related costs. The analysis also reveals which working couples are unaffected by the penalty and potentially the beneficiaries of a marriage tax subsidy. This article’s purpose is not to influence couples’ marriage decisions but to inform tax professionals, taxpayers, and regulators regarding the current state of the extra tax burden associated with marriage.

Brief history and background

The dual-earner marriage tax penalty is created by several provisions. The Revenue Act of 1913² created the first provision, the standard deduction, by providing a $6,000 deduction for unmarried dual-earner couples ($3,000 per single taxpayer) but only $4,000 for married couples. The head-of-household (HOH) status was introduced in 1951 to provide tax relief to war widows. However, by creating preferential treatment for unmarried working parents, this new tax status magnified the dual-earner marriage tax penalty for married parents of dependent children.

TheTax Reform Act of 1969³ established a progressive tax rate structure based on taxpayers’ filing status (e.g., single, married filing jointly (MFJ), or HOH), thus expanding and firmly embedding the marriage tax penalty within the tax system. Still later, the Tax Reduction Act of 1975⁴ created the earned income tax credit (EITC) to help low-income working households. However, while well intended, the credit was introduced in a manner that further expanded the marriage tax penalty for low-income, married working parents of dependent children.

These fundamental tax provisions⁵ establish the following taxing order: Single-earner married couples incur the lowest tax burden; unmarried dual-earner couples incur a greater burden; and dual-earner married couples incur the greatest burden. Over the years, Congress has modified the marriage tax penalty through various tax reforms, including, most recently, the TCJA. However, since 1913, the federal income tax burden of a dual-earner couple generally increases if they marry, and this penalty is greater if the couple have dependent children.

The marriage tax penalty following the TCJA

The TCJA greatly modified many components of the Code, including those affecting the marriage tax penalty. The following discussion presents the sources of the marriage tax penalty in the post-TCJA era. While some working couples without dependent children may now be unaffected by the penalty, the Code continues to penalize dual-earner married couples with dependent children. Further, many couples, with and without children, including Baby Boomers who are retiring, may be affected by several new deduction limitations.

Marriage tax neutrality or subsidy

Because the TCJA expanded some reforms introduced by the American Taxpayer Relief Act of 2012 (ATRA),⁶ the Code provides greater equity for dual-earner couples with no dependent children. In other words, the 2018 Code may in some situations impose a tax burden on a married couple filing jointly similar to that of two single filers combined. The table “Effect of Standard Deductions on Filing Statuses,” (below) presents the 2018 standard deduction amounts and tax brackets for single, MFJ, and HOH taxpayers. ATRA equalized the standard deduction, establishing that the standard deduction for an MFJ couple should equal that provided two single taxpayers. The TCJA increased both standard deductions, preserving this equality. In 2018, the $24,000 MFJ standard deduction equals twice the $12,000 single filers can claim.

In addition, ATRA partially equalized the tax brackets so that married couples may have the same amount of taxable income subject to the lower brackets (15% or less) as two similarly situated single taxpayers combined. The TCJA further expanded the equality of the progressive rate system. Beginning in 2018, the tax brackets of an MFJ couple are equal to those provided two single taxpayers through $600,000 of taxable income. Therefore, beginning in 2018, there may be no marriage tax penalty for many dual-earner couples with combined adjusted gross income (AGI) of $624,000 or less.⁷ Married couples with AGI in excess of $624,000 may pay the highest marginal tax rate of 37%, while their unmarried counterparts may not be subject to the top rate until their combined AGIs exceed $1,024,000.

If the couple do not support dependent children and have unequal incomes, i.e., one partner’s income significantly exceeds his or her partner’s, the couple may enjoy a tax subsidy if they marry. This marriage tax subsidy is a consequence of income sharing. While a married couple combine their income to take full advantage of the lower tax brackets, the higher-earning unmarried partner may pay a significantly higher marginal tax rate than his or her partner.

One type of couple has benefited from a marriage tax subsidy since 1913: the single-earner couple. When a working taxpayer marries a nonworking partner, the taxpayer’s tax status generally shifts from single to MFJ, which increases the standard deduction, reduces the tax liability under the progressive rate system, and provides a variety of preferential tax treatments. The TCJA preserved this preferential treatment for single-earner married couples.

The liberation from the marriage tax penalty or the presence of a marriage tax subsidy only applies to a defined group of couples, i.e., those without dependent children, with unequal earnings, who do not claim some common deductions, and/or who are not collecting Social Security benefits. However, the majority of American couples are not single-earner,⁸ and many have dependent children living in the household. Therefore, it is important to examine how the marriage tax penalty affects those households.

Marriage tax penalty

Head-of-household status

The TCJA preserved the HOH status. While there is some equalization between an MFJ couple and two singles, there is no similar equity when one of the unmarried partners can claim HOH status. In other words, when one partner files as single and one claims HOH status, the unmarried couple receive preferential tax treatment relative to their MFJ counterparts.

Specifically, the Code provides the unmarried couple with a greater combined standard deduction, $30,000 ($18,000 HOH plus $12,000 single), relative to the MFJ couple’s $24,000, and a lower marginal tax rate because of the expanded lower tax brackets provided to HOHfilers, as presented in the table “Effect of Standard Deductions on Filing Statuses.” A couple with one HOH filer has more income subject to no tax, to the 10% rate, and to the 12% rate. Consequently, an MFJ couple pay a higher effective tax rate (average of AGI) relative to their unmarried counterparts. The chart “Effective Tax Rate for MFJ Couple vs. Unmarried Couple,” (below) estimates this difference and illustrates the influence of HOH status on couples’ marriage tax penalty.

Because the Code provides HOH status to unmarried parents of dependent children, it penalizes all dual-earner working parents who marry. For low-income households, unmarried couples benefit from a greater standard deduction, shielding more income from any tax. Middle- and upper-income households pay a higher average tax rate also because of the progressive tax rate structure. The table “Unmarried vs. ­Married Couple in 10% and 12% ­Brackets” (below) contrasts the differences from HOH status and estimates that the preferential treatment may penalize a corresponding married couple $2,712 in additional tax every year. Had the married couple been able to invest the $2,712 instead of paying it in taxes, they would have accumulated $54,304 after 15 years, assuming a 4% annual rate of return.

Deduction limitations

Post-2017, the student loan interest deduction, the state and local tax (SALT) deduction, the mortgage interest deduction, and the alternative minimum tax (AMT) may contribute to the marriage tax penalty. There are three important points regarding these provisions:

• A couple may be affected by some or all of these provisions, increasing their annual marriage tax penalty.
• The cost of these provisions is in addition to the marriage tax penalty associated with dependent children, i.e., the marriage tax penalty created by the HOH status and the EITC. Consequently, the marriage tax penalty of some working parents may have been exacerbated by the TCJA.
• The marriage tax penalty, including the cost from these provisions, as discussed in the preceding section, is not a once-in-a-lifetime penalty but a recurring cost that may repeat for many years. Therefore, even if the annual cost appears relatively low, the total tax burden over many years of marriage may be considerable. For example, a couple who face an annual marriage tax penalty of $500, $2,000, or $5,000 incur a total extra tax burden of more than $6,000, $24,000, and $60,000, respectively, over a 10-year period.⁹ If the married couple had instead been allowed to invest those amounts, even at a modest rate of return, the cumulative effects could contribute significantly toward financial security, paying off debt, and preparing for retirement.

The table “Provisions That Contribute to Marriage Tax Penalty and Estimated Annual Cost” (below) presents the post-TCJA estimated cost of these new provisions, which depends on the taxpayer’s marginal tax bracket. In 2018, the deduction limits for student loan interest ($2,500) and the SALT deduction ($10,000) are provided on a per-return basis. Consequently, two unmarried taxpayers have twice the deduction allowance for both provisions relative to their married counterparts.¹⁰ The student loan and SALT deductions are significant deductions claimed by millions of taxpayers.¹¹ The 1997 Taxpayer Relief Act¹² placed the student loan interest deduction “above the line.” Therefore, even nonitemizers may claim this deduction.¹³ The SALT deduction includes both income-based taxes and the real estate taxes that individuals pay on their homes. Therefore, the SALT deduction limit may affect a wide range of couples and not just high-income earners in high-tax states.

For example, a couple in the 22% marginal tax bracket may incur an annual penalty of as much as $550 because of the student loan interest limitation, plus another potential $2,200 because of the SALT limitation, for a total annual marriage tax penalty of $2,750. The average student loan debt of 2016 college graduates is $37,172.¹⁴ If both partners have that amount of student loan debt, for a total of $74,344, at 6% interest, they would pay $24,700 in interest over a 10-year loan period.¹⁵ Putting the extra $2,750 per year toward repaying the debt would allow the couple to pay off the loans almost three years earlier and save more than $7,300 in interest payments.

The family home is commonly many couples’ single largest investment, with many relying on borrowed funds to purchase it.¹⁶ Mortgage interest is an itemized deduction,¹⁷ subject to a debt limit. Again, the limit is provided on a per-return basis and was decreased to interest on $750,000 of mortgage indebtedness per return by the TCJA.¹⁸ Consequently, two single taxpayers are granted interest deductions on twice the limit of indebtedness, or $1.5 million. Further, this double limit applies even when the unmarried partners purchase their home together as an unmarried couple.¹⁹ Subject to half the debt limit, the married taxpayers may suffer a marriage tax penalty of several thousand dollars in the first year of the loan, and many thousands of dollars over the life of the loan. The table “Provisions That Contribute to Marriage Tax Penalty and Estimated Annual Cost” presents one scenario, estimating the annual and total cost of this deduction limit for a 4%, 30-year mortgage for couples in the 12%, 22%, and 32% marginal tax brackets.

Although the TCJA eliminated the corporate AMT, the TCJA failed to eliminate the individual version and maintained the AMT’s contribution to the marriage penalty. While the Code grants unmarried couples an AMT exemption of $70,300 each, or $140,600, married couples have an exemption of only $109,400 (for 2018). Applying the lowest AMT rate of 26%, this often-overlooked contributor to the marriage tax penalty may cost married couples $8,112 annually.

The parent tax

The tax system penalizes married dual-earner couples who support dependent children, relative to their unmarried counterparts. While HOH filing status itself creates the positive link between children and the marriage tax penalty,²⁰ the EITC magnifies the problem for low- to middle-income households. Because the TCJA preserved HOH status and the EITC, it retained these sources of a possible marriage tax penalty for dual-earner parents of dependent children.

The EITC is relatively complex — a function of the number of qualified children and income, first increasing and then decreasing with income. It is intended to motivate parents to work but phases out as parents’ earnings increase. Further, the EITC is refundable and may be relatively large as a percentage of household income. The original EITC in 1975 provided a maximum credit of $400, or $1,903 in 2018 dollars.²¹ For 2018, the maximum credit was $6,431, more than three times the original credit and, therefore, likely more important to low-income working taxpayers.

The marriage tax penalty from the EITC comes from the fact that an unmarried parent calculates his or her credit using only individual earned income, while the married couple use their combined income. HOH filers earning less than $49,194 in 2018 could claim some level of the EITC. This limit increased by only $5,690 to $54,884 for MFJ filers. Because marriage forces working couples to combine their income for EITC calculation purposes, marriage may significantly reduce or eliminate the EITC available to parents of dependent children.

To illustrate the total cost of the marriage tax penalty, which includes the influence of both HOH status and the EITC, the charts “Penalty on Working Couples With Dependent Children” and “Penalty on Working Couples With Dependent Children, as Percentage of Household Income,” (below) present the marriage tax penalty both pre- and post-TCJA, for 2017 and 2018, respectively. Both charts assume that each partner contributes equally to household income, which ranges from $30,000 to $500,000; that the couple have two dependent children under age 13 who are both the children of the HOH filer of the unmarried couple; and that the couple do not claim itemized deductions.²²

The TCJA clearly did not eliminate the penalty for working parents. There is some indication that the TCJA provided some relief to wealthier couples, specifically those earning more than $250,000. However, because wealthier couples are more likely to itemize, the limitation on itemized deductions, discussed above, likely reduces the relief shown in the two charts. The marriage tax penalty remains fundamentally unchanged for working parents earning less than $90,000 per year. Therefore, the TCJA preserved the harsh impact of the marriage tax penalty on low- to middle-income households, reaching 8.5% at $50,000 of AGI.

Stage-of-life examples

To aid in the discussion, six types of couples are shown in the tables “Comparison of Code’s Effects on Couples at Various Stages of Life” and “How Marriage Tax Penalty Is Affected by Which Partner Claims HOH status” (below). Each table provides a glance at the marriage tax penalty faced by couples at the various stages in their lives.

The table “Comparison of Code’s Effects on Couples at Various Stages of Life” presents equal-earner couples. Couple 1 represent recent graduates repaying their student loan debt. They have one child, are trying to save for their first home, and do not claim itemized deductions. Marriage will cut their student loan deduction limit in half, to only $2,500 per year, and eliminate the preferential treatment associated with HOH status. Therefore, their marriage tax penalty is about $1,101, or 1.1% of their gross income. In other words, they will annually save $1,101 if they do not get married, which could help them pay off their loans or purchase their house.

Couples 2 and 3 are dual-earner working parents of dependent children. Therefore, they both would incur a tax penalty if they marry. Couple 2 claim itemized deductions. Couple 3 incur child care expenses. Because Couple 2 have only one child, their marriage tax penalty, $1,092 (1.4% of AGI), is less than that of Couple 3, $2,151 (2.7%), who have two children. The EITC is a function of the couple’s dependent children. Therefore, the marriage tax penalty increases with the number of dependent children.

Couple 4 represent empty-nester households, where the dependent children have grown and left the house and the couple have substantial earnings but are not yet retired. Because they live in a high-tax state, they are affected by the SALT deduction limits and incur a marriage tax penalty of $2,199, or 2.8% of AGI. The penalty would further increase if the couple also faced a mortgage deduction limitation. Thus, the TCJA unwinds some of the equity provided to married couples under ATRA.

The table “How Marriage Tax Penalty Is Affected by Which Partner Claims HOH status” (below) presents couples with unequal earnings. Couple 1 represent a low- to middle-income working household, while Couple 2 earn above the U.S. median. Because both couples support dependent children, both would incur a tax penalty if they marry. However, the penalty is affected by which partner claims HOH status. While it seems intuitive that the higher-earning partner should be the HOH, this may not be the case in some circumstances. For example, the children may be biologically related to only the lower-income partner.

For Couple 1, the penalty is $2,109 (5.3% of AGI) if the higher-earning partner is the HOH and $2,131 (5.3%) if it is the lower-income partner. The difference is far greater for Couple 2, who shift from a $970 (1.4%) penalty with the higher-earning HOH, to $4,550 (6.5%) if the lower earner is the HOH. Therefore, Couple 2 can reduce their tax liability dramatically by remaining unmarried, especially if the lower-income partner is able to claim HOH status.

Retired/senior couples

As Baby Boomers continue to retire, many tax professionals may see a significant increase in the percentage of their clients who collect Social Security. Prior to 1984, Social Security benefits were tax-free to all recipients. Beginning in 1984,²³ Congress ended that long-standing exclusion and levied a tax on up to one-half of taxpayers’ ­Social Security benefits. However, Social Security would be taxed only if the taxpayers’ total combined income, which included the sum of the taxpayer’s AGI, tax-exempt interest, and one-half of the Social Security benefits, exceeded a specified threshold. For unmarried taxpayers, the threshold was set at $25,000, and $32,000 for a married couple.²⁴ Beginning in 1994,²⁵ Congress added a second tier of threshold amounts ($34,000 for individuals and $44,000 for a married couple filing jointly), increasing the percentage of Social Security benefits that may be subject to tax to 85% for higher-income taxpayers. Panel A of the table “Effect of Marriage Tax Penalty on Social ­Security Recipients” (below) presents the thresholds.

Both the 1984 and 1994 changes expanded the marriage tax penalty and subjected a whole new class of taxpayers to its cost — senior citizens collecting Social Security benefits. Because neither of these thresholds has increased or is scheduled to increase automatically, more couples may find themselves affected by these limits. Two singles have a $50,000 threshold, compared with their married counterparts with $32,000, an $18,000 difference. However, because only 50% of Social Security income is considered in this estimation, an unmarried couple may receive up to $36,000 more in Social Security benefits before triggering the taxation of their benefits, relative to a married couple. The second-tier limits provide a $24,000 difference and an 85% inclusion percentage.

Not all seniors will incur a marriage tax penalty. For example, couples receiving less than $32,000 of total combined income per year will generally incur no penalty, unless they are affected by another provision, e.g., the SALT limitation. For couples with total combined income exceeding $32,000, the marriage tax penalty depends on a variety of factors, including each partner’s Social Security benefits and the couple’s total other income. Panel B of the table “Effect of Marriage Tax Penalty on Social Security Recipients” presents the marriage tax penalty under a variety of scenarios. For each couple, the penalty represents approximately 2% of the couple’s total income. This penalty can substantially burden couples who are ­living on fixed incomes.

Warning: While all couples must always consider all legal consequences associated with marriage versus remaining unmarried, other legal implications may be extremely important for seniors. For example, marriage may reduce or eliminate federal and state estate and inheritance taxes. Further, the expenses and legal obligations associated with medical expenses and assisted-living services may be greatly affected by a couple’s marital status, and these laws may vary greatly by state. Therefore, all seniors should consult with their attorneys before either divorcing or marrying. However, the rules for spousal Social Security income indicate that spousal benefits may not necessarily be reduced simply due to divorce.

Continuing an unequal policy

Following the enactment of the TCJA, the federal tax system continues its long-standing policy of taxing similarly situated married and unmarried couples differently. In other words, the Code does not provide horizontal equity. Further, the inequitable tax treatment does not consistently favor married or unmarried couples but increases the marriage penalty for some, e.g., dual earners with dependent children, and subsidizes others, e.g., single-earner households. The table “Married Versus Unmarried Couples” (below) summarizes the differences.

Knowing about these differences should help couples and their tax advisers make informed marriage decisions that incorporate the tax penalty provisions. For example, some dual-earner couples with no dependents may be surprised to discover that they benefit from a marriage tax subsidy. However, others may find that the mortgage restriction or new SALT deduction cap increased their marriage penalty. Some couples expecting their first child may determine that the marriage tax penalty imposes a financial burden that they simply are unable or unwilling to accept.  

Footnotes

¹P.L. 115-97.

²Revenue Act of 1913, Ch. 16, 38 Stat. 114.

³Tax Reform Act of 1969, P.L. 91-172.

⁴Tax Reduction Act of 1975, P.L. 94-12.

⁵Since 1913, various other minor provisions have contributed to the marriage tax penalty, generally those involving income phaseouts. These four referenced provisions are the primary contributors that have endured.

⁶American Taxpayer Relief Act of 2012, P.L. 112-240.

⁷Because the standard deduction reduces AGI by $24,000, a couple with $624,000 of AGI has $600,000 of taxable income.

⁸Only considering married couples, the U.S. Bureau of Labor Statistics reports that the majority of couples have been dual-earner (with both ­partners contributing financially to the household) since 1978. See Bureau of Labor Statistics, “Working Wives in Married-Couple Families, 1967-2011,” ­available at www.bls.gov.

⁹Assuming a 4% annual discount rate.

¹⁰A married couple cannot double their deduction limit by filing separately.

¹¹Individual income tax filing information is available from the IRS Statistics of Income Tax Stats page, available at www.irs.gov.

¹²Taxpayer Relief Act of 1997, P.L. 105-34.

¹³Student loan interest was deductible, along with all other types of interest, as an itemized deduction until it, along with most other forms of personal interest, was repealed by the Tax Reform Act of 1986, P.L. 99-514.

¹⁴Mitchell, “Student Debt Is About to Set Another Record, but the Picture Isn’t All Bad,” The Wall Street Journal (May 2, 2016), citing an analysis by Mark Kantrowitz, publisher of higher-education website Cappex.com.

¹⁵Mortgage/Loan Calculator at mycalculators.com.

¹⁶Baker and Chinloy, Public Real Estate Markets and Investments (Oxford University Press 2014).

¹⁷Sec. 163(h)(3).

¹⁸For acquisition indebtedness incurred after Dec. 15, 2017 (Sec. 163(h)(3)(F)(i)(III)).

¹⁹Voss, 796 F.3d 1051 (9th Cir. 2015), rev’g Sophy, 138 T.C. 204 (2012). In Action on Decision 2016-02, the IRS acquiesced to this Ninth Circuit decision, which permits the doubling of the purchase mortgage limit for two cohabitating singles.

²⁰Puckett, “Rethinking Tax Priorities: Marriage Neutrality, Children, and Contemporary Families,” 78 University of Cincinnati Law Review 1409 (2010).

²¹From January 1975 to January 2018, using the Bureau of Labor Statistics CPI Inflation Calculator at data.bls.gov.

²²Note, based on the IRS Statistics of Income data, the assumption that a couple will take the standard deduction historically holds for approximately 80% of the cases where the couple’s combined income is $100,000 or less. However, couples with higher levels of income are more likely to itemize. The increase in the standard deduction should result in more couples, across all earnings levels, claiming the standard deduction.

²³Social Security Amendments of 1983, P.L. 98-21.

²⁴Social Security Administration, “Taxation of Social Security Benefits,” available at www.ssa.gov.

²⁵Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, also referred to as the Deficit Reduction Act of 1993.