The Marriage Penalty

Using the spreadsheet supplied with this website, here is an example of the marginal tax hump for a single individual with a $30,000 Social Security benefit.

SingleTax
Free
Net
Before
Your Personal Hump
SSBStartEndWidth
Single$30,000$42,400$60,114$64,568 $73,706$9,138
Partners$60,000$84,800$120,228$129,136 $147,412$18,276
SingleTax
Free
Net
Before
Your Personal Hump
SSBStartEndWidth
Single$30,000$42,567$60,579$65,122 $73,706$8,584
Partners$60,000$85,134$121,158$130,244 $147,412$17,168

If two single individuals were living together as domestic partners, their combined tax hump would merely be twice the size of each individual.

Here is the same spreadsheet representing the marginal tax hump faced by the same couple if they decided to get married and file a joint return.

SingleTax
Free
Net
Before
Your Personal Hump
SSBStartEndWidth
Single$30,000$42,400$60,114$64,568 $73,706$9,138
Partners$60,000$84,800$120,228$129,136 $147,412$18,276
Married$60,000$77,373$110,498$119,405 $126,941$7,536
Penalty$7,427$9,730$9,731$20,471 $10,740
SingleTax
Free
Net
Before
Your Personal Hump
SSBStartEndWidth
Single$30,000$42,567$60,579$65,122 $73,706$8,584
Partners$60,000$85,134$121,158$130,244 $147,412$17,168
Married$60,000$77,784$111,373$120,459 $126,941$6,482
Penalty$7,350$9,785$9,785$20,471 $10,686

What Causes The Marriage Penalty?

The primary cause of the Marriage Penalty is the starting positions for the taxability of your Social Security benefits. The calculation of the “basis” for this taxation is the same, basically half of your Social Security benefits plus your other taxable income. 50% taxability starts when the basis exceeds $25,000 for a single individual, which would double to $50,000 for domestic partners. But the 50% taxability starts at only $32,000 for a married couple, and 85% taxability starts at $44,000, which is still $6,000 less than the $50,000 combined start of the 50% taxability level for the domestic partners.

At the $50,000 taxable basis level $11,100 of the married couple’s Social Security is being taxed while none of the domestic partner’s benefits are taxable. Over the next $18,000 of income another $15,300 of the married couple’s benefits become taxable while only $9,000 of the domestic partner’s benefits become taxable. At this point the marriage penalty reaches its maximum where an additional $17,400 of the married couple’s benefits are being taxed.

This $17,400 taxable penalty continues for variable amount of income based on the size of the Social Security benefits levels. If the total benefit levels of each couple are identical, the domestic couple will continue to increase their taxable benefits for another $20,471.

So, basically, the married couple’s Social Security benefits are taxed at lower income levels. Their potential tax free income is $7,427 less, and their personal tax hump starts $9,731 before that of the domestic partners. Since this results in them saving less tax dollars at the lower income levels, the size of their personal hump is also smaller because they have less to give back to the IRS.

At higher income levels, when everyone is paying their full hump taxes, everything basically evens out because at that point everyone is paying taxes on the same 85% of their Social Security Benefits. Married couples just pay it earlier. The only penalty that remains is that the additional over 65 standard deduction is only $1,300 for married individuals and $1,600 when you are single.

The Survivor Penalty

If you did not plan your inheritance properly, your surviving spouse could have the same income as you did as a married couple while being faced with higher tax rates because they will have to file the same income levels as a single individual instead of a married couple.

If your inheritance to each other passes as taxable income the immediate and lifelong tax penalties could be substantial. Even if the taxes are not immediate as your individual IRA is combined, sort of tax free now, with your spouses IRA, the larger combined IRA will have a much larger MRD, Minimum Required Distribution, for the remainder of the surviving spouses lifetime.


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