Marriage Tax Bonus?
In cases where a married couple’s total tax obligation is lower than the combined amount they would owe if filing separately as individuals, they can receive a marriage bonus. This scenario often occurs when one partner has a significantly higher income than the other in marriage.
Pooling their incomes, the couple can benefit from lower tax brackets, tax credits, and previously unavailable deductions to them when filing as individuals. Consider this scenario, suppose a couple who is not married collectively earns $120,000 in total income for the year 2023, with one individual bringing in $0 and the other earning $120,000.
In this scenario where the couple decided to tie the knot and file their taxes together, their total tax responsibility would amount to only $10,921. This reduction in tax burden is attributed to their eligibility for a higher standard deduction and a more favorable marginal tax rate due to their joint filing status.
Marriage Tax Penalty?
On the flip side, a marriage penalty emerges when the total amount of taxes owed by a married couple is greater than the sum of what they would owe if they were still filing separately as single individuals. The act of pooling incomes through joint filing can push both partners into higher tax brackets, resulting in couples with comparable earnings facing more marriage penalties compared to couples where one partner earns the bulk of the income.
In assessing the marriage penalty for individuals with higher incomes, it is crucial to consider the 3.8% investment income tax. This tax applies to single filers earning above $200,000 and married filers earning over $250,000 in adjusted gross income.
Moreover, individuals who fall under these tax brackets will also face an extra Medicare levy of 0.9% on income exceeding $200,000 for single taxpayers and $250,000 for those married couples filing jointly.
Avoiding Marriage Penalty
It is crucial for married couples to have a clear understanding of their tax situation to plan for taxes effectively. One helpful approach is to explore various scenarios to predict your tax obligations prior to filing. In most cases, choosing to file taxes separately does not typically lead to significant benefits for couples, although there could be exceptions in unique circumstances that arise.
Consider examining all available deductions and credits in order to lower your total tax obligation. Married partners who choose to file jointly are eligible for various tax credits, such as the Earned Income Tax Credit, education credits, and the Child and Dependent Care Tax Credit.
Take into consideration the phase-out thresholds that could impact your qualifications. To handle marriage penalties and bonuses effectively, it is advisable to seek guidance from a tax specialist. Their expertise can offer personalized advice based on your circumstances. The team of dedicated Tax Professionals at RapidTax are renowned experts in the field, boasting more than ten years of experience assisting clients with their tax returns.
