Congress created laws several years ago to mitigate the effect of married couples paying a higher tax than two single people living together. The extra tax was commonly known as the “marriage penalty”.
The Fiscal Cliff Tax Bill passed last week has brought this marriage penalty back into existence and it appears to be even greater than in prior years.
For example, we ran some calculations on what the income tax (including the Medicare surtax on wages) would be for a married couple where each earned $400,000 in wages versus two singles earning $400,000 each. We assumed a standard deduction for both cases. There is no exemption deduction since both cases are over the threshold.
The married couple would owe about $260,000 of income taxes and another $4,950 of Medicare surtax for about $265,000 in total federal taxes. Each single person would owe about $114,000 of income tax and $1,800 of Medicare surtax. Doubling these amounts results in total tax for the two singles of about $232,000.
As you can see, the married couple pays about $33,000 of extra tax each year that they are married. On the same amount of income, the married couple has an effective tax rate of 33% while the two singles have an effective rate of about 29%. The married couples penalty is 4% of their gross income.
It would not surprise us to see the “divorce” rate for higher income couples increasing as compared to the prior several years.
Paul Neiffer, CPA