The marriage penalty tax is back. Here’s how it works.
What follows is not a complete list but contains the most common marriage penalty areas in current federal tax law.
- Tax Brackets. Although the 10% and 15% brackets have no marriage penalty, starting with the 25% bracket married filers experience brackets shifting at less than double the single amounts. In other words, if you’re at a 25% or higher tax bracket, you and your spouse will pay less if you are single than if you are married.
- AMT (alternative minimum tax). The AMT exemption amounts and AMTI limits at which the phase-out of the exemption begins are not double the single levels for married couples. And the threshold at which the AMT rate changes from 26% to 28% is the same regardless of filing status. Again, you’ll pay less for AMT if you’re single than if you’re married.
- Capital Losses. Capital losses in excess of gains are limited to $3,000 per year, regardless of filing status (except Married Filing Separately – MFS). This is an important distinction for MFS. People hear about the marriage penalty and then think they can get around it by filing separately. No! In almost every case, married filing separately gives you the highest possible taxes.
- Social Security. The base amount over which social security benefits are taxed is $25,000 (or $34,000) for singles and $32,000 (or $44,000) for marrieds. If two people are on Social Security, they would get $50,000 exempted if they are single, but only $32,000 if they are married.
- Rental Losses. The allowance for actively managed rental real estate losses is $25,000 whether single or married and that allowance phases out beginning at $100,000 modified adjusted gross income for all.
- IRA AGI (adjusted gross income) Limits. AGI limits that are not double the single amount affect a number of other items including, but not limited to: deductible IRAs and Roth IRA contributions.
- Earned Income Tax Credit. Taxpayers with lower income may still see marriage penalty due to losing the earned income tax credit (EITC). As one earns more, his or her EITC rises, but as earnings rise further, the EITC phases out. According to the 2013 tables, the maximum EITC is $6,044 (with three or more children), and when earned income is above $46,227 the EITC is zero.
- Other individual tax credits. Generally, tax credits are structured such that the amount of the credit falls when income exceeds a certain threshold, ultimately phasing out to zero. When marriage results in a combined income that is in a credit’s phase-out range (or is so high the taxpayers are ineligible for the credit), the credit amount may be reduced resulting in increased tax liability. Credits that are
subject to income limitations include:
The Child and Dependent Care Credit: The amount of the child and dependent care credit is limited to no more than the income of the lower earning spouse. If one spouse has no income, the couple generally would not qualify for the credit.
The Child Tax Credit: The value of the child tax credit phases out as a taxpayer’s income rises above a certain income level. The phase-out threshold for married couples is less than twice that for unmarried individuals. As a result, two unmarried individuals might each qualify for the credit but receive a smaller credit or become ineligible for it if married.
Education Tax Credits: The income levels at which taxpayers are ineligible for education tax credits tend to be twice as high for married couples as for singles. Marriage is unlikely to affect the overall credit amount among couples whose income is equally distributed between the two partners. However, among couples whose income is less evenly distributed, the value of their education credit will depend on the income level of the individuals who incur education expenses, and could increase or decrease as a result of marriage depending on the taxpayers’ particular circumstances.
Adoption Credit: The adoption credit is generally not allowed when adopting a spouse’s child. Therefore, the Windsor decision may mean that some same-sex partners who might otherwise have been able to claim an adoption credit will no longer be able to do so.
These are just some of the many new tax issues we’re facing in 2013. More than ever before, you need a tax preparer who knows the new rules and can create strategies to reduce their impact.
How much can we save you? Give Richard a call at 888-592-4769 and find out how you can become a client with our progressive, proactive full-service tax firm.