A Marriage Penalty Lingers in the Tax Code
Courtesy of Tom Ploskanka, C.P.A.
A marriage is worth celebrating, but bringing up the marriage penalty may bring down the celebration. The marriage penalty occurs in the tax code when you paymore tax as a married couple than you would as two single filers making the same amount of money. This occurs throughout the federal tax code. The following are two examples:
The tax rate problem
If the tax tables did not differentiate between single and married, you could assume the married income required to move to the next highest tax rate would always be double that of a single filer. This is not the case.
As an example, when you’re a single filer, income above $91,901 is taxed at 28%. When you file a joint return with your spouse, the 28% rate starts at $153,101. You will notice that the beginning of the 28% tax bracket for married couples ($153,101) is not twice the $91,901 amount applied to each of you when you were single. The outcome is an increase in tax on your combined income over what you would have paid individually.
Accelerating the phase-outs
Another example of the marriage penalty occurs in the acceleration of phase-outs of personal exemptions and itemized deductions for married couples versus single filers. These deductions begin when your adjusted gross income (AGI) is greater than $313,800 if you’re married filing a joint return and $261,500 when you’re single. Think the marriage penalty only impacts upper income? Even the Earned Income Tax Credit (EITC) phase-outs favor single taxpayers over married taxpayers. A single mother of three can qualify for the EITC with income less than $48,340, where a married couple loses the EITC with combined income over $53,930.
Not surprisingly, there are some couples who simply decide not to marry to avoid the penalty, but obviously this option isn’t right for all couples. If you are planning to marry in the near future, do not be caught by surprise with a larger than expected tax bill. Call to review your situation.
Tax-Free Income
Yes, that’s correct, there are some forms of income you receive that may be tax-free. Here is a list of ten common sources of tax-free income:
1. Gifts. Gifts you receive are not taxable income to you. In fact, they are not subject to gift tax to the person giving the gift as long as the gifts received in one year from one person do not exceed $14,000.
2. Rental income. If you rent your home or vacation cottage for up to 14 days, that rental income does not need to be reported.
3. Child’s income. Up to the standard deduction amount ($6,350 in 2017) in earned income (wages) and $1,050 in unearned income (interest) for children is not taxed. Excess earnings above these amounts could be taxed and $2,100 in unearned income is taxed at the parent’s tax rate.
4. Inheritance. In most states, beneficiaries typically do not pay tax on the value of what they inherit. When inherited property is sold by the beneficiary, however, there may be a capital gains tax obligation.
5. Roth IRA earnings. As long as you meet this retirement account type’s rules, earnings in a Roth IRA are not taxed.
6. Life insurance received. The full value of life insurance received is not taxable income. However, the proceeds may be taxable within the estate of the deceased policyholder.
7. Child support revenue. Income you receive as child support is not deemed to be taxable income. On the other hand, alimony received is taxable income.
8. Home sales gains. Up to $250,000 ($500,000 for married filing jointly) in gains on the sale of a qualified principal residence is not taxable.
9. Scholarships/fellowships. Money received to cover tuition, fees, and books for degree candidates is not generally taxable.
10. Refunds. Federal refunds (technically you’ve already accounted for this income) and most state refunds for non-itemizers are also tax-free.
This is by no means a complete list of tax-free income, but it’s nice to know that some areas of tax law still benefit taxpayers.
