Is the IRS' 'Marriage Penalty' Real?

Marriage does indeed have many financial ramifications -- both good and bad -- and several involve the dilemma over whether to file income taxes together or separately. Let's sort through the noise.
08/09/2012 04:14 pm ET Updated Oct 09, 2012

If your spouse-to-be is considering postponing the wedding because of fears about the so-called "marriage penalty," you two probably have bigger issues than whether you'll have to pay higher taxes as a married couple than when you were single.

Having said that, marriage does indeed have many financial ramifications -- both good and bad -- and several involve the dilemma over whether to file income taxes together or separately. Let's sort through the noise:

First, a quick primer on how progressive taxation works. As your income increases, the additional income gets taxed at increasingly higher rates. Currently there are six federal tax rates ranging from 10 percent for low-income families and individuals to 35 percent for earnings more than $388,350 a year. Most people's income straddles several brackets.

For example, a single person with $50,000 in taxable income would pay 10 percent tax on the first $8,700 earned; plus 15 percent on income between $8,700 and $35,350; plus 25 percent on income between $35,350 and $50,000. Thus, you're not paying 25 percent on the full amount; just on the portion within that range. (For a complete table of 2012 tax rates for all filing statuses, CLICK HERE.)

The marriage penalty occurs when couples file a joint tax return and, in certain cases, wind up paying higher income tax than they would have if they'd remained single. Here's how it typically shakes out:

  • If you're married and have only a single household income (or if one spouse earns significantly more than the other) you usually get a "marriage bonus" -- that is, your combined income is taxed at a lower rate than if the high earner were paying tax as a single person.
  • However, once you enter the higher end of the 25 percent tax bracket, the cost disparity between filing jointly and as a single person becomes more pronounced as your combined income increases, especially if you earn fairly similar amounts and/or you're both highly paid.
  • For example, single people with $75,000 in taxable income fall squarely within the 25 percent tax bracket; however, if you're married and earn a combined income of $150,000, you would hit the 28 percent bracket, whether you file jointly or as "married, filing separately." (Unmarried head of household status has its own set of rules and dollar limits.)
Some would argue, then, that getting married is a financial disadvantage, but that's not necessarily true. Married couples are eligible for many tax breaks and other benefits that often more than compensate for paying higher income tax. For example:
  • If you have medical coverage through your spouse's employer, monthly premiums are not considered taxable income, as they are for unmarried domestic partners.
  • Similarly, your spouse can pay for your medical expenses on a pretax basis using his or her flexible spending account.
  • You're entitled to 50 percent of your spouse's Social Security benefits while he or she is alive and can collect their benefit amount after death if it exceeds your own. Plus, you're entitled to a $255 spousal death benefit.
  • If you die without a will, your spouse automatically inherits your estate, tax-free. Everyone else besides spouses must pay taxes on estates valued over $5.12 million. (This limit will revert to $1 million in 2013 unless Congress extends it.) Similar rules apply to estate and inheritance taxes levied by states.
  • Married people are usually charged less for auto and other insurance than singles.
If you're married and considering the "married, filing separately" option, keep in mind that you'll miss out on several tax credits and deductions that are only available to joint filers (or single people). For example:
About the biggest advantage of choosing "married, filing separately" is that you're not liable if your spouse files an inaccurate or fraudulent tax return.

It's important to note that several tax law provisions designed to reduce the marriage penalty are due to expire at the end of 2012 unless Congress intervenes, so keep an eye on year-end legislation.

And finally, if you're not yet married, along with premarital counseling you might want to schedule a session with an accountant who can tell you what impact your new combined income will have on your taxes so you can adjust your W-4 withholding accordingly.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.