I've been thinking more about the marriage penalty b/c of Obama's tax plan. For those of you who don't understand what the frak I'm talking about, here is a brief marriage tax penalty 101.
The US income tax system is a progressive system. This means that the more you make, the more you pay to Uncle Sam. This is achieved by the bracket system. Here are the current U.S. tax brackets:
Table A: Single tax return:
If taxable income is: |
Amount of tax that you owe is: | ||
More than: | However, not over: | This amount (or %) plus % of: |
Amount over: |
$0 | $7,550 | 10% | -- |
$8,025 | $32,550 | $803 + 15% | $8,025 |
$32,550 | $78,850 | $4,481 + 25% | $32,550 |
$78,850 | $164,550 | $16,056 + 28% | $78,850 |
$164,550 | $357,700 | $40,052 + 33% | $164,550 |
$357,700 | -- | $103,792 + 35% | $357,700 |
If taxable income is: |
Amount of tax that you owe is: | ||
More than: | However, not over: | This amount (or %) plus % of: |
Amount over: |
$0 | $16,050 | 10% | -- |
$16,050 | $65,100 | $1,605 + 15% | $16,050 |
$65,100 | $131,450 | $8,963 + 25% | $65,100 |
$131,450 | $200,300 | $25,550 + 28% | $131,450 |
$200,300 | $357,700 | $44,828 + 33% | $200,300 |
$357,700 | -- | $86,770 + 35% | $357,700 |
These charts are pretty comprehensive, but basically, the idea is that if you are single and earn in the highest (35%) tax bracket (over $357,700), you would still have your first $8,025 of income taxed at the lowest rate (10%), income between $8,025 and $32,550 taxed at the second rate (15%) etc... So only amounts you make OVER $357,700 would be taxed at the 35% rate.
Which is fine, except that if you look at the married filing joingly brackets, the last two ($200,300-$357,700 and above $357,700) are suspiciously similar to the single filer brackets. Which means that for higher end earners, there is a "marriage tax penalty" because they theoretically don't get the same benefits of the lower tax rates as singles filing separately.
However, under the Jobs and Growth Tax Relief Reconciliation Act of 2003 the impact of the marriage penalty on married couples who choose to file jointly on their income taxes was significantly reduced. This was done by equalizing the standard deduction for singles and married couples and increasing the end point of the 15 percent tax bracket for married couples filing jointly.
I've run the numbers:
(1) For two people making $200,000 each filing as singles, their tax would be:
2 x ($40,052 + 33% ($35,450)) = $103,501
and if they were married filing jointly (combined income of $400,000), their tax would be
$86,550 + 35% ($42,300) = $101,575
Here, the married couple actually comes out better. (For mathphobes - srsly, not so hard, just follow the charts above)
(2) However, if you get a bit richer and have both couples making the top bracket number of $357,700, then if they file as singles, their total tax bill will be:
2 x $103792 (from chart) = $207,584
compare that to the married couple (combined income of $715,400)
$86770 + 35% ($357,700) = $211,965
The married couple would have to pay $4381 more in taxes.
It's a penalty, but not as bad as the MSM would have us believe. Basically this comes down to exactly how the lower brackets are divvied up. If you look at the charts above, the top brackets may be very similar between married and singles, but the lower brackets give pretty significant advantages to married couples.
Interestingly, Obama's proposed income threshold is $200,000 for singles, $250,000 for married couples, which is not the split of any of the brackets listed above. The intuitive thing to believe is that these will be the new higher tax brackets:
Single $200,000 - $357,700 at 36%
$357,700 and above at 39.6%
Married filing jointly $250,000 - $357,700 at 36%
$357,700 and above at 39.6%
This may not be true, as he didn't specify the split at which the 39.6% bracket would kick in. If he actually moves the $357,700 higher for married filing jointly, that will help defray the marriage penalty some.
This was a learning experience for me, because I too was under the conception that the marriage penalty was really really bad. But the numbers don't support that until you are getting pretty statospheric in your combined salaries. My final ruling: not a penalty, stop picking on the O.
Cross-Posted at Momocrats.