“$50,000 isn’t really a big spread,” Kaplowitch said. “People may just cohabitate because it’s better from a tax perspective.”
Varying rates
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Penalties — and bonuses — for being married or single have existed in the tax code for decades because the system is based on household income and the rates vary, said Eugene Steuerle, co-founder of the Washington-based Tax Policy Center.
Lawmakers have adjusted since the 1940s where to set income-tax brackets to address inequities among different types of families including married couples and singles, said Dennis Ventry, a professor at the University of California Davis School of Law who specializes in family taxation. Families often feel the marriage penalty if they don’t account for it when deciding how much to withhold from their paychecks throughout the year for taxes, Ventry said.
The marriage penalty also affects lower-income households who may phase out of benefits such as the earned income tax credit because as a couple, their income is too high, he said.
President George W. Bush’s income-tax cuts reduced the marriage penalty by setting the 10 percent and 15 percent brackets for married couples at double the amount for individuals, which essentially splits a couple’s income for tax purposes, Steuerle said.
The budget deal passed Jan. 1 extended marriage-penalty relief for those brackets and for the standard deduction, which is used by those who don’t itemize. While that helped married couples in the lower-to-middle-income tax brackets, the law didn’t apply the same relief to top earners, Steuerle said.
“Among the people most likely to be caught by this are two professionals, highly paid doctors or lawyers,” said Steuerle, whose Tax Policy Center is funded by the Brookings Institution and the Urban Institute.
High earners with significant income from capital gains and dividends may feel a bigger tax bite because they are married.
A married couple with taxable income of $600,000 a year is subject to the top 20 percent rate because they exceed the $450,000 threshold, while if they each recognized $300,000 individually they would pay at the 15 percent rate. That doesn’t include the 3.8 percent investment-income surtax.
Early planning
The multiple levels of higher rates mean families should start planning early this year because there are ways to save on taxes or reduce their sting.
Married couples should review their withholding to make sure they are taking out enough from their paychecks for taxes, Ventry said. The higher-earning spouse usually should be the one accounting for the family’s exemptions and any additional withholding, because they are in the higher bracket, he said.
Couples also should consider installment sales of appreciated assets such as real estate or stakes in a business, said Baker Crow, senior vice president of the private wealth management group at Regions Financial Corp. That can help spread the income received over more than one year, he said.
Socking away investments that generate income in tax-deferred individual retirement accounts as well as harvesting losses throughout the year to offset gains are strategies for married couples, said Kent Kramer, chief investment officer of the investment advisory firm Foster Group.
Timing of deductions also will be more of a focus this year, said Susan Bruno, an accountant and financial planner at Beacon Wealth Consulting.
“If you have unusually high income one year, that’s probably not the year you want to make your normal contributions and deductions,” Bruno said.
The option for a married couple to file separately rather than jointly is still generally more expensive even with the higher rates, said Marcum’s Perry. And while couples face a marriage penalty, advisers aren’t seriously recommending divorce for tax reasons.
Some tax-conscious high earners who haven’t yet married may see staying single as a way to avoid the penalty. Steuerle, though, says there are other financial advantages to marriage such as the way Social Security benefits are structured.
“People who are less concerned about the formal marriage vow have more ability” to avoid the penalty, he said.
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