Tax Time: Will “Marriage Penalties” Affect You?

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Tax season is stressful for people in all types of relationships and tax brackets. Keeping track of all your financial details and ensuring you don’t over- or under-pay is complicated for everyone in the country simply because of our current tax code. There are so many loopholes and penalties for unexpected items that it takes a professional to make sense of it all.

This post provides an explanation of some California marriage penalties, how they affect people, and how to tell whether you’ll be affected by these booby traps in the tax code.

What Are “Marriage Penalties?”

A marriage penalty is a quirk in tax law that leads to a married couple paying more taxes than they would if they had the same assets and income but were unmarried.

Historically, there was just a single tax code and one set of brackets applied to married and unmarried people alike. This changed after Poe v. Seaborn when a married couple from Washington State brought a case before the Supreme Court.

Their argument was that, in states where marital income was considered “community property,” the income should be divided between spouses and taxed in the lower-income bracket. The Supreme Court agreed, and from there, the differences in taxes between married and single individuals proliferated.

Today, the difference between married and unmarried taxes can be significant. Here are five of the most common ways in which being married can dramatically affect your tax burden.

Equal Earners

The first and most fundamental way marriage can affect your taxes is by changing the income bracket into which you fall. Marital tax brackets were first set with the unequal earnings situation in mind. After Poe v. Seaborn, the goal of marital brackets is to compromise to prevent that situation from arising again.  

The compromise rate is higher than if the community assets were split in half but lower than if one person earned all the income. That means that if both spouses have relatively similar salaries, they will pay more in income taxes than they would if they were single. This is the equal earners’ marriage penalty, where two people would be better off financially if they weren’t married.

Mortgage Interest Deductions

The next marriage penalty is the result of deductions and how they’re implemented for married people. A useful deduction for areas with a high cost of living (COL) is the federal mortgage interest deduction. In California, it’s particularly important because many major cities have a median home cost of over a million dollars. Mortgages that large can lead to a significant deduction.

Both single individuals and married people are entitled to the same mortgage interest deduction. Only the interest paid on the first $750,000 of a mortgage can be deducted. In high COL areas, that’s often not enough to buy a home. However, if two single people bought a house together, they would be able to write off the interest of two $750,000 mortgages, or up to $1.5 million. That puts married people at a disadvantage financially.

SALT Deductions

Another critical deduction is the federal reduction for state and local taxes, known as “SALT.” These taxes used to be entirely deductible, but that is no longer the case. After the Tax Cuts and Jobs Act of 2017, SALT deductions were capped at just $10,000 for both individuals and married couples.

This is another situation in which married couples lose out on tax deductions because they are together. Instead of being able to deduct the entire $20,000 like two single people could, they must give up that additional $10,000. Suppose your combined income is high enough to generate more than $10,000 in state and local taxes. In that case, you face a significant marriage penalty. 

Second Marriages

If you have divorced and remarried, you face additional penalties that you would not usually need to worry about. There are two specific potential penalties: alimony and child support.

Alimony Adjustments

The first penalty to you and your current spouse is alimony. Before the Tax Cuts and Jobs Act, alimony payments were tax-deductible for the paying party and taxable as income for the recipient. This was considered fair for everyone involved because the paying party didn’t have access to those funds, and the recipient did.

However, once the Act went into effect, alimony payments were no longer tax deductible for payers. Recipients considered this good news because they were no longer taxed on their alimony payments. However, suppose you or your spouse has been ordered to pay alimony to a former partner. In that case, you’re paying taxes on a significant chunk of your income that you do not get to use.

Child Support

Like alimony, child support is not tax-deductible. This has been the case for child support for far longer than it has for spousal support orders, though. Since child support payments are intended to cover the costs you would have if you were raising your child with their other parent, they are not deductible.

As a result, if you have married someone who is paying for a child of whom they don’t have custody, you face two penalties. First, the support payments themselves are not tax-deductible. Second, you do not get to claim the Child Tax Credit for having custody of a dependent child.

Conclusion

The tax code is so complex that your marital status can dramatically affect what you owe. From your property taxes to your fundamental income bracket, the IRS takes your relationship status into account. While getting married can be excellent for your relationship, it may have adverse effects on your finances.

Don’t let your marital status affect your taxes. If you’re in a transition period regarding your marriage, reach out for help. A minor change like the date your marriage begins or ends can significantly affect your financial burden for the year. With advice from an experienced attorney, you can avoid falling victim to marriage penalties whenever possible.

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