Measure Offers Little Relief for Marrieds

The big tax cut passed by Congress last weekend was supposed to give married couples a break. But the relief is too little and comes too late, experts say.

It was hoped the $1.35-trillion tax reduction legislation would eliminate the so-called marriage penalty--a nagging glitch in the U.S. tax code that causes married couples with two incomes to pay significantly more tax than they would if they weren’t married.

The bill, which President Bush is expected to sign this week, provides some relief to two-income married couples. But the tax breaks are modest, addressing only a few of the tax penalties for dual-income marrieds that pockmark the code. Moreover, most of the relief is delayed until 2005--a point at which about one in five couples who marries this year already will have filed for divorce, according to the National Center for Health Statistics.

“It isn’t a great help,” said Brenda Schafer, a tax research expert at H&R; Block in Kansas City, Mo. “It’s just a little tweak.”

Shahnila Ahmad, a 23-year-old biochemist from Michigan, is well aware of the financial consequences of marriage. She and 29-year-old Saaqib Rangoonwala of Los Angeles, will face a significant tax penalty after they marry in August.

“It’s really a problem, because when you’re getting married and trying to start a family, there are a lot of expenses,” Ahmad said. “You would have more money if you just lived together. We couldn’t do that, so you just have to struggle.”

The relief included in the measure is slim at best, giving couples such as Ahmad and Rangoonwala a tax break that gives them enough extra money to cover dinner and a movie in time to celebrate their fifth wedding anniversary.

Consider a hypothetical husband and wife, each with $25,000 in taxable income--or $50,000 combined. This couple would pay about $1,400 more in federal income tax than two single people earning the same.

But this married couple will get just $466 in tax relief in 2006, according to an analysis by CCH Inc., a Riverwoods, Ill.-based publisher of tax information. In other words, they still will pay substantially more federal income tax than if they had stayed single.

The problem isn’t just a matter of timing. The breaks for married couples will take effect in stages, getting a bit more generous each year. But even when they’re in full effect in 2009, they still will fall short of solving the marriage penalty problem, said Mark Luscombe, principal tax analyst at CCH Inc.

“There are 40 or 50 areas in the tax code that cause a marriage penalty,” he said. “This only addresses [a few] of them.”

Some tax code provisions create marriage penalties--and some create bonuses. For instance, although two-income married couples pay more tax than singles with similar earnings, single-income married couples pay less.

Both the marriage penalty and the marriage bonus are caused by inequities in three areas of the tax code: tax brackets, the standard deduction and tax credits.

* Tax brackets. U.S. income taxes are based on progressive rates, meaning the more you earn, the higher percentage you pay in taxes. However, the income thresholds that trigger higher tax brackets are never twice as high for married couples as they are for single taxpayers.

Consequently, two singles with taxable income of $25,000--or $50,000 total--each pay 15% of that in tax. But a married couple with a combined income of $50,000 would pay 28% on the portion of their income above $43,840--the income threshold at which tax brackets change for married couples filing jointly.

Thus, the married couple pays $800 more in income tax on the $6,160 in taxable income than two single taxpayers with the same taxable income combined. To be specific, each single pays $3,750 in tax, or $7,500 combined. If they were married, they’d pay $8,300--an increase of $800.

* Standard deduction. For two singles, the standard deduction is $4,550 each, or $9,100-- considerably more than the standard deduction for married couples--$7,600. Because deductions are used to shield income from taxation, that difference cost a married couple in the 15% tax bracket $225 this year.

* Tax credits. Many tax credits and deductions are tied to income. If you earn more than set amounts, you lose your ability to claim them. Because the married thresholds frequently are more than twice the single thresholds, married couples lose out again.

In fact, H&R; Block’s Schafer said, one of the most onerous income requirements affects low-income parents trying to qualify for the earned income tax credit, a break for the working poor.

No taxpayer earning more than about $32,000 a year can qualify for the credit. However, the income test makes no distinction for marital status. The result: Low-income married couples with children lose the right to claim thousands of dollars in tax breaks.

For instance, a married couple with two children and $40,000 in combined income--$20,000 from each parent--can’t claim the earned income tax credit. However, if this couple split and each claimed one child as a dependent, each would get an earned income tax credit of $1,181--or $2,362 total.

“It’s fundamentally unfair,” said Violet Woodhouse, a family law attorney in Newport Beach. “As a society, we are trying to encourage the legal status of marriage. To penalize these couples with taxes is just something we shouldn’t do.”

Although the latest census figures show an increase in the number of unmarried couples living together, there’s no statistical evidence that the marriage penalty is the cause. Still, concern about the government undermining the institution of marriage spurred Congress to include marriage penalty relief in the tax package.

Congress opted for a two-pronged approach. The measure raises both the standard deduction and the income thresholds for married couples in the 15% bracket until the thresholds reach 200% of the relevant levels for singles.

However, the marital status disparities in all higher tax brackets remain unchanged. That means higher-income couples--who often pay thousands of dollars more in federal income taxes because they are married--will get little relief compared with the amount of additional income tax that they pay.

In another change that will help lower-income couples, starting next year, the income limit will rise by $1,000 for married couples claiming the earned income credit.

Why didn’t Congress provide greater relief, or at least phase in the breaks faster? Budget restrictions, said Susan Bates, tax director at Deloitte & Touche in San Francisco. Congress was authorized to spend only so much money on tax relief. Each dollar given to married couples had to come at the expense of a tax break for some other group.

Still, many people think married couples should have gotten more.

“We promote public policy by the way we tax,” Woodhouse said. “Unless we want to start promoting a single lifestyle, you need to give more to married couples.”

Recent Times articles on the tax cut are available at www.latimes .com/taxes.

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Tax Relief for Married Couples

Here’s what taxpayers in various brackets will save from the gradual broadening of the standard deduction for married couples. Widening the 15% bracket will provide additional savings for many couples.

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Tax Year bracket 2005 2006 2007 2008 10% $32 $77 $91 $105 15 48 116 136 157 28 82 193 227 261 31 92 216 255 293 36 108 255 300 345 39.6 119 270 318 316

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Source: H&R; Block

Who Pays More?

Who pays the marriage tax penalty and who gets a bonus? Generally, a two-income married couple pays more tax than a single couple with the same income. But a single couple in which one person earns all--or almost all--of the money would be better off married.

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Married Single John & Sue John & Sue John & Sue Wages: $70,000 $30,000 $40,000 $70,000 Standard deduction -$7,600 -$4,550 -$4,550 -$4,550 n/a Personal exemptions -$5,800 -$2,900 -$2,900 -$2,900 n/a Taxable $56,600 $22,550 $32,550 $62,550 n/a Tax $9,972 $3,382 $5,584 $13,997 $0 ($8,966 combined)

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Source: Times research