​Does the Federal Marriage Penalty Affect You?

If you’re married, you probably didn’t give a lot of thought to the tax implications of your union.

That’s not really surprising. But what you might not know is that there is a thing called the federal marriage penalty.

Usually, you’re better off filing a joint return if you’re married. By opting for the married filing jointly status, you’re more likely to get a lower tax rate, share in the same tax benefits, and qualify for tax benefits you wouldn’t otherwise get if you chose married filing separately.

The marriage penalty comes into play whenever the tax on a couple’s joint return is more than what they’d pay in combined taxes if there weren’t married and filed a single or head of household return.

The Tax Cuts and Jobs Actprovided some relief. It expanded all but the highest of joint filers’ income tax brackets to double that of single filers.

So, who does the marriage penalty affect? Well, lots of different kinds of people. It impacts low- and high-earners who make about the same amount, high-earners with the Medicare surtax, high-earners with the Net Investment Income Tax, high-earners with long-term capital gains, and homeowners with a big mortgage.

Here’s a quick-hit list of other impacts:

• Lower capital loss deduction — A married couple can deduct capital losses up to $3,000 in total. The same two people, if single, could deduct a total of $6,000 ($3,000 each).
• Lower passive activity loss deduction — A married couple can deduct passive losses up to $25,000 in total. The same two people, if single, could deduct a total of $50,000 ($25,000 each).
• State and local income tax deductions — If itemizing, the cap on state and local income tax deductions is $10,000 jointly. The same two people if single could each get the $10,000.
• Mortgage interest — If itemizing, the cap on interest for a mortgage is limited to the first $750,000 of a loan jointly. The same two people if single could each get a deduction on the $750,000.
• The Medicare surtax — This kicks in at $250,000 for married couples but $200,000 each for single filers (combined being $400,000).
• The earned income tax credit — This is subject to limits that are less than double the single taxpayer.
• Taxability of Social Security benefits — This kicks in quicker than double that of a single taxpayer.

So, when should you file separate returns? Again, married filing jointly is usually your best bet. But if there’s a big discrepancy in your and your spouse’s income — especially if one of those incomes is very low — it may be worthwhile to file separate returns. But again, there’s no universal rule.

Questions about which married filing status is right for your situation? Let us know.