This spring I experienced the most important event in my life up to this point. I somehow convinced the most beautiful woman I have ever met to marry me, and she actually went through with it.
Everyone in both our families seems to be happy with this union. That is everyone except our Uncle Sam. Instead of attending the event and showering us with a gift from a local department store registry or even sending us a card of congratulations and best wishes, he has decided to punish us. Sam must think that we are making a huge mistake because he has decided to pick our pockets just for tying the knot.
Of course, we're not alone. According to the Congressional Budget Office, Uncle Sam punishes over 21 million couples each year. I'm referring, of course, to the federal income tax law's marriage penalty. The marriage penalty doesn't effect everyone, but if you're married and you earn moderate to low-income, you have more than a 50% chance of being penalized. In other words, our government is hurting those who are attempting to do the right thing and can afford it the least.
How did this seemingly "anti-American" quirk in the law come about? In 1948 Congress changed the tax law to allow income splitting. In effect, couples were taxed like two single taxpayers even if only one earned income. The result was to sharply lower tax rates for married couples, providing a de facto tax subsidy for marriage. By 1969 the magnitude had grown to such an extent that in some instances a single person paid 40% more in taxes than a married couple with the same income. This imbalance led Congress to create separate tax rate schedules for married and single people in the hope of reducing the subsidy to no more than 20%.
As they say, beware of politicians with the best of intentions. The result of the 1969 change was not to level the playing field between single and married workers, but instead to create an actual tax penalty on marriage. Here's how the penalty works. Because we have a progressive tax system – higher tax rates for higher income – when a two-income couple file a joint return, the combined assets quite often push them into a higher tax bracket. That means that the secondary earner – usually the wife – will be taxed at a higher rate than he or she would have if they had stayed single.
Let's say that both husband and wife make $24,650 a year in taxable income. If they had remained single, they would each be taxed under the same 15% rate. But, since they made the mistake of falling in love and exchanging rings, they now make a combined taxable income of $49,300 a year. Since the 15% tax rate is capped at the first $41,200 of income for married couples, the remaining $8,100 is taxed at the higher 28% rate. This boils down to a tax penalty of $1,053 – the difference between the two rates.
My wife and I find ourselves in a similar situation, only slightly worse. Both of us are in the initial stages of our careers, and prior to marriage we were both living basically paycheck-to-paycheck. Now that we've decided to start building a family, the government is saying; "Congrat's, that'll be $1,320 please!" Nothing has changed for us income wise mind you, just the change in tax we owe due to marital status.
Luckily, I knew of this penalty before I proposed, and I thought the opportunity to marry my wife was more than worth the penalty. Granted, we could use that money to purchase living room furniture or towards the purchase of a home, but we're not complaining.
For others, however, this obstacle could mean the difference between working together towards a little piece of the American Dream, or going it alone because wedded bliss just costs too much.