The Homa Files

The Bush tax cuts completely did away with the income tax marriage penalty, right ?

Au contraire, mon ami. 

That’s just an urban legend repeated so many times that many have been led to believe it. 

Me included.

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Let’s go through the numbers with an example:

Assume a couple — boyfriend and girlfriend (or any other combination of two people) — each earn $100,000 in taxable income.

According to the 2009 schedule X tax table (individuals), they’d each pay $21,720 if they file separately. 
(The tax table is at the end of this post if you want to check my arithmetic)

So, the unmarried couple pays a total of $43,440 in income taxes (2 X $21,720) — that’s an effective tax rate of 21.7%.

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What if they were married and filed a joint return?

Well, the good news is that the standard deduction ($11,400) is twice an individual’s standard deduction — it wasn’t until Bush fixed it.  And, their personal exemption amount ($7,300) is double an individual’s (because they’re below the phase out income level).

So, we can just pull their number from the $200,000 taxable income line of the 2009 schedule Y tax table (married filing jointly).

The answer: their tax liability is $44,277.50 — about 2% higher than if they were unmarried and filing individually.

Technical note: Married filing separately doesn’t make the problem go away.  You’re either married or your not.

If you think a 2% difference is just rounding error, let’s move up the tax schedule.

Assume that he & she (or whatever) each earn $200,000 taxable income.    Their combined income tax liability would be $102,285 if they were unmarried and filing individually, and $110,362 if they were married and filing jointly — a spread of almost 8%.

For sure, that’s some serious money …

Technical note: The penalty is relative small at incomes below $50,000 (per person) … and relatively small at very, very high incomes that are taxed mostly at the highest bracket rates.

Bottom line: The marriage penalty may have been reduced, but it’s still there … and in a later post, I show how it swells when Obama lets parts of the Bush tax cuts expire.

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2009 Tax Rate Schedules

http://www.unclefed.com/IRS-Forms/taxtables/index.html

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Next up: Those (expletive deleted) Bush tax cuts …

This entry was posted on April 6, 2010 at 7:58 am and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.