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| The Basics | The myth of the marriage penalty
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Despite complaints about higher taxes on married couples, the reality is that more couples get a bonus when they marry than suffer a penalty. Add to that legal and financial benefits, and marriage looks like a pretty good deal.
By Liz Pulliam Weston
If you believed the rhetoric that accompanied the newest tax cut, you would think that marriage was the most financially devastating event that could happen to two people and that Congress was riding to the rescue by eliminating the marriage penalty.
Not quite.
The reality is that even before the new tax act, more couples got a tax bonus when they married than suffered a penalty.
Add to that all the legal and financial benefits of marriage, and the state of wedded bliss for most people was far from economically disadvantageous.
Lifes even better now the penalty has been mitigated -- at least temporarily -- for most of those who were affected in the past. Meanwhile, those in line for a bonus will see an even bigger one.
Hold on a minute
The problem with this happy state of affairs is that one of the most egregious marriage penalties still exists, and the new tax act does nothing to address it.
But more on that in a minute.
For now, lets return to this idea that marriage was somehow a bad deal financially before Congress acted.
To be sure, millions of people did pay for the privilege of saying I do. Forty-two percent of married taxpayers paid more because they were filing jointly than they would have if they remained single, according to a 1996 Congressional Budget Office analysis. The average penalty was a significant $1,380.
But more couples -- 51% of the total -- paid less tax jointly than if had they not married. The average bonus these couples received: $1,300.
The people who got a tax break by marrying were those with disparate incomes. The wider the gap between the paychecks of the husband and wife, the bigger the bonus.
The people who tended to face a marriage penalty were those with similar incomes. Typically, the more they made, the bigger the penalty they paid.
But the people who faced the most egregious penalties, as a portion of their income, were the working poor, according to tax expert Edward McCaffery , a law professor at the University of Southern California and the author of Taxing Women. A couple who each earn $10,000 could end up with a marriage penalty of more than $4,000.
Good benefits add to wedded bliss
For most middle- and upper-income people, though, there are plenty of financial benefits to marriage, regardless of their income tax situation. Among them:- Workplace health and pension benefits coverage. While some companies offer health coverage to domestic partners, this benefit is typically taxable as income. When spouses are covered, the benefit is tax-free.
- Social Security retirement and survivor benefits. A husband or wife is entitled to one-half of the spouses Social Security benefits and to additional benefits in the event of death.
- Lower insurance rates. Married people usually get a discount on auto insurance and may pay less for other types of insurance.
- Automatic inheritance rights. Die without a will, and your spouse gets your stuff. In many states, the surviving spouse has a legal right to at least one-third to one-half of your estate.
- Preferential estate tax treatment. The $1 million estate tax limitation doesnt apply to married people: you can leave an unlimited amount to a spouse without owing one penny of estate tax. In certain states, this benefit is multiplied by special capital-gains tax treatment for homes and other assets held by married couples as community property.
These benefits will persist, even if Congress marriage-related tax changes dont. (All the marriage-related changes are scheduled to expire at the end of next year, although Congress will face tremendous pressure to renew them.)
And at least for now, the income-tax penalty is history for the majority of couples. The standard deduction for married couples is now twice that for singles, and the 15% tax bracket has been widened for marrieds to $56,800, twice the limit for singles.
Those who didnt face a penalty, but got a bonus instead, will see that bonus rise. The change in the standard deduction alone will save couples $155, and the larger 10% and 15% bracket could add hundreds more.
Theres still a potential for an income tax marriage penalty once joint incomes reach the 25% bracket, although married couples will still pay less in taxes this year than last.
A penalty still on the books
The marriage penalty that remains has to do with Social Security taxes and working spouses -- particularly women.
The Social Security Administration says 62% of the women over age 62 who receive benefits do so based on their husbands work records, rather than their own. A little more than half of these women didnt earn enough to qualify for payments based on their own work records. The rest opted to take half of their husbands benefit because it was larger than the check they could qualify for based on their own earnings.
Now, in one very real sense, these women are better off married, since they benefit from their husbands larger Social Security checks.
In another sense, theyre severely penalized, since all the Social Security taxes they contributed over the years essentially yield no additional benefit. They'd get the same payments if they'd never worked and paid into Social Security.
This is no small potatoes. Social Security taxes now eat up 6.2% of the every workers paycheck, up to an annual maximum of $5,394 on earnings of $87,000, while employers contribute an equal amount.
As more women work, and earn better salaries, the proportion claiming benefits based on a spouses record may decline somewhat. But because men still earn more on average than women, this phenomenon certainly wont disappear. Given the precarious state of Social Security and political realities, this is one marriage penalty thats likely to persist.
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