How the Marriage ‘Penalty’ and ‘Bonus’ Work
To illustrate how the phenomenon known as the “marriage penalty”--or, in some cases, “marriage bonus”--works, let’s look at the hypothetical case of Sally Smith and Michael Jones.
Smith and Jones, two young singles, each earned $32,000 in 1998. But thanks to personal exemptions ($2,700 per person) and standard deductions ($4,250 per single filer), their taxable income amounted to just $25,050 each. That put them squarely in the 15% federal tax bracket. They each pay $3,757.50 in federal income tax, or $7,515 total.
If they had married in 1998, however, they would have declared more taxable income and paid tax on some of that income at higher rates. Why? Their $64,000 combined income would have been reduced by two personal exemptions ($5,400) and the married, filing jointly standard deduction of just $7,100. They’d pay tax on the remaining $51,500, compared with a combined taxable income of $50,100 when they were single. Combining their income also pushes some of their wages into the 28% bracket, because the tax rates for dual filers are computed on a different scale. Net result: They would owe $8,914.50--nearly $1,400 more than if they were single.
Sally and Michael, single:
Sally: Total taxable income: $25,050
Tax rate: 15%
Federal tax: $3,757.50
Michael: Total taxable income: $25,050
Tax rate: 15%
Federal tax: $3,757.50
Total combined tax obligation: $7,515
Sally and Michael, married:
Total taxable income: $51,500
Tax rate: 15% on the first $42,350; 28% on the next $9,150
Federal tax: $8,914.50
Marriage penalty: $1,399.50
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However, the whole picture changes if Sally and Michael’s income was the same but distributed differently. Let’s say, for example, that Sally has total income of $64,000. Michael, meanwhile, is getting a graduate degree and not earning any money.
If single, Sally would have paid tax on $57,050--the income remaining after subtracting the single person’s standard deduction of $4,250 and one personal exemption of $2,700. And a good portion of that income is taxed at a 28% rate. Net result: She’d pay $12,678.50. With no income, Michael pays no tax.
But if Sally and Michael were married, they’d get to subtract the value of two personal exemptions and a boosted standard deduction. Their tax would amount to just $8,914.50. Marriage bonus: $3,764.
Sally and Michael, single:
Sally: Taxable income: $57,050
Tax rate: 15% on the first $25,350; 28% on the next $31,700
Federal tax: $12,678.50
Michael: Taxable income: 0
Tax rate: NA
Federal tax: 0
Sally and Michael, married:
Taxable income: $51,500
Tax rate: 15% of the first $42,350; 28% of the next $9,150
Federal tax: $8,914.50
Marriage bonus: $3,764
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The Taxpayer Relief Act of 1998 proposes to reduce the marriage penalty by doing one simple thing: boosting the standard deduction for married couples to twice the standard deduction for singles. Had this provision been in effect for 1998, Sally and Michael’s marriage penalty would have dropped by $392 (28% of the $1,400 difference in the standard deductions) in the first example. Net marriage penalty: $1,007.50.
However, this change would also boost the marriage bonus that this couple could reap, if their incomes were divided unequally as they are in the latter example, because a bigger deduction means lower taxable income. Net marriage bonus: $4,156.