Question: My fiancé and I live together and will retire very soon. If we marry, will the marriage penalty affect how much we pay in federal taxes on income and Social Security?
Answer: The marriage penalty refers to the difference in the federal income tax assessed on joint income earned by a married couple and the federal income tax assessed on two single individuals filing separate tax returns. Because of the marriage penalty, some married couples had to pay more federal income tax than two unmarried taxpayers that filed separately. The marriage penalty affected married couples from every income bracket. Couples with a wider gap between their incomes often escaped the marriage penalty, but couples with similar income usually paid a penalty.
The enactment of legislation in 2001 reduced the application of the marriage penalty by equalizing the standard deduction rate for singles and married couples. For example, in 1999 the standard deduction for single filers was $4,300, while the deduction for married couples was only $7,200. Because of the legislation, married couples filing jointly currently enjoy the same standard deduction rate as single filers. As it currently stands, married couples are allowed a standard deduction of $8,600.
Legislation also eliminated some of the marriage penalty tax by increasing the 15% tax bracket for married couples filing jointly. In 1999, single taxpayers paid a 15% tax on income of $25,750 or less. Married couples, however, only qualified for the 15% tax bracket if the income on a joint return was $43,050 or less. The elimination of the marriage penalty has equalized the 15% tax bracket for single filers and married couples filing jointly. Thus, married couples will now pay taxes of 15% on income of up to $51,500. The marriage penalty tax, however, may still apply when a married couple's income exceeds the 15% tax bracket.
The marriage penalty sometimes affects the amount of federal income tax older couples pay on Social Security benefits. For example, if the base amount of a married couple's "combined income" -- adjusted gross income in addition to nontaxable interest and one-half of Social Security benefits -- is more than $32,000, the couple will have to pay taxes on a portion of the Social Security income. A single tax filer, on the other hand, will only pay income tax on a portion of Social Security benefits if the combined income exceeds $25,000. As a result, single filers living together can earn up to $50,000 without the assessment of federal income tax on Social Security benefits.
Unless extended by Congress, current laws softening the marriage penalty will only remain in effect through 2010.
For more information on tax issues facing older taxpayers, see IRS Publication 554, Older Americans Tax Guide, available at http://www.irs.gov/.