By Laura Saunders
More than two million American couples will get married this
year. Many of them will pay more in taxes because they tied the
knot.
The Republican tax overhaul passed in 2017 lowered the cost of
being married for many couples. Even so, being married is often
more expensive than being two single filers come tax time. If a
couple has children and both spouses earn income, they can owe
Uncle Sam thousands of dollars every year just for being
married.
These marriage penalties, as they're called, prompt some
committed couples to leave the knot untied. Some even have big
weddings but don't marry legally.
While most couples choose to keep this decision private, one
famous (well, famous for economists) couple has been pretty open
about the decision.
Betsey Stevenson and Justin Wolfers, economists with
international reputations at Gerald R. Ford School of Public Policy
at the University of Michigan, have been together for years. They
are the parents of two children. But they aren't married and say
one reason is taxes.
Filing as two single people provides the couple with significant
tax savings, according to Ms. Stevenson, though she declined to say
how much.
By being public, the couple hopes to stimulate policy
discussion.
A common complaint about the current tax structure is a
difference between couples that have similar incomes and couples in
which one partner earns much more. Under the law, a couple whose
incomes are far apart often pay less if they're married, while
couples whose earnings are more evenly split often pay the same as
or more than two singles.
"Any household where one earner is generating the same income
that Justin and I generate together is better off than we are,
because of the value of the stay-at-home spouse's time," says Ms.
Stevenson. She has proposed a tax credit for the second-earning
spouse.
Here's how marriage bonuses and penalties work in practice,
based on examples computed on the Tax Policy Center's 2019 Marriage
Calculator. It's free and useful for what-if calculations.
Say that two couples each have total income of $225,000 and no
children or itemized deductions.
In the first couple, one partner earns $210,000 and one earns
$15,000. If they marry, they'll save about $8,400 compared with
filing as two singles.
In the second couple, one partner earns $145,000 and the other
earns $80,000. Being married will save them about $300 compared
with filing as two singles.
Things change if each couple has two young children and typical
deductions for mortgage interest, state taxes and charity. The
couple with one high and one low earner has a marriage bonus,
although it drops to about $3,200.
The second couple now has a big marriage penalty.
They owe about $4,000 more than they'd pay as two single filers
-- just for one year. Having a $50,000 capital-gain windfall would
add nearly $1,000 to their penalty.
The reasons for these disparities are complex, says Roberton
Williams, a tax economist at the University of Maryland.
He says that in a system that imposes higher rates as income
rises, like America's, it's impossible to tax married couples based
on their total income regardless of who earns it while also taxing
married couples so they owe the same as two single people.
"The U.S. system creates marriage bonuses and penalties. Other
countries avoid this by taxing married couples as two individuals,"
Mr. Williams adds. Shifting to such a system could be difficult in
the U.S., in part because of community-property laws in some
states.
The tax code also has marriage penalties in specific
provisions.
For example, singles can't directly contribute the maximum
amount to a Roth IRA for 2019 if they earn more than $122,000. For
married couples the limit is $193,000 -- not $244,000.
The 2017 tax overhaul repealed some marriage penalties and
broadened some tax brackets, helping many two-earner married
couples. But it retained other marriage penalties and added
more.
One is the new $10,000 limit on deductions for state and local
taxes, or SALT. This limit is per return, so married joint filers
who list deductions on Schedule A get only a $10,000 write-off,
while two single filers living together get a $20,000
write-off.
Affluent married couples hoping to buy a home in expensive areas
like San Francisco, Washington, D.C., or New York could also feel a
pinch. The overhaul dropped the maximum mortgage debt that's
eligible for an interest deduction on new purchases to $750,000
from about $1 million, and the limit is per return.
So an unmarried couple can deduct interest on $1.5 million of
mortgage debt, while the limit for a married couple is
$750,000.
For couples contemplating marriage, estimating the tax cost can
be hard.
One reason is that marriage penalties often vary over time. For
example, a two-earner couple may not owe a penalty when they are
first married. If they become a one-earner couple when they have
children, they may get a marriage bonus.
If both spouses work and prosper, however, their penalty could
grow.
Says Ms. Stevenson: "People tell me, 'I didn't mind paying more
tax when we were first married, but now it's enough to put a dent
in college tuition.'"
Laws also change. Marriage penalties removed by the 2017
overhaul will return after 2025 if Congress doesn't act.
Yet another complication is that the U.S. tax code provides
marriage bonuses, even to couples who owe marriage penalties. For
example, a spouse who inherits a traditional IRA or 401(k) account
has better options than a non-spouse heir.
Unmarried couples face other costs and issues, of course. They
may pay more for health coverage, and they have to prepare two tax
returns. They'll need to take special care with health proxies,
powers of attorney and other legal documents giving them
decision-making powers over each other and children.
Married couples who currently owe penalties have options for
lowering them, but not many.
One is to reduce reported income where possible, say by
contributing to tax-deductible retirement plans or spreading
taxable capital gains over more than one year.
Also consider the "married, filing separately" status. This
choice doesn't allow couples to file as two singles, and it usually
raises taxes. But sometimes it lowers them, as when one partner has
a small business that qualifies for a 20% deduction if a
higher-earning spouse's income is excluded. It could also help if
one partner has high medical expenses.
How about getting divorced? That's a lot harder than getting
married. And the Internal Revenue Service for decades has had the
power to disregard divorces that are solely for tax reasons.
Write to Laura Saunders at laura.saunders@wsj.com
(END) Dow Jones Newswires
July 19, 2019 05:45 ET (09:45 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.