As most of you are likely aware, our federal income tax system imposes a marriage penalty on some couples. If both individuals are making similar income at certain levels, then the combined income will put them in a higher joint bracket (or married filing separately bracket) than if they filed a single taxpayers. [This problem is partly alleviated now (but not completely) by a temporary adjustment of brackets and increased standard deduction. But next year that stuff expires and this all gets worse.]
What I want to do is evaluate what potential incomes result in what penalties. I can run the numbers on any given two incomes easily enough, but I’d rather represent the information in a more systematic way so that I can easily evaluate a range of possibilities. But I have to admit my math is a little rusty. I can construct some crude multi-variable algebraic equations, but I feel like I’m not doing it right or as efficiently as it could be done. So I’m hoping some of you math types will give me a hand in constructing the model–I don’t even know enough to say whether some kind of graph makes sense, or if it should be a table, or what.
The relevant information (for 2009) is this:
10% on income between $0 and $8,350
15% on the income between $8,350 and $33,950; plus $835
25% on the income between $33,950 and $82,250; plus $4,675
28% on the income between $82,250 and $171,550; plus $16,750
33% on the income between $171,550 and $372,950; plus $41,754
35% on the income over $372,950; plus $108,216
10% on the income between $0 and $16,700
15% on the income between $16,700 and $67,900; plus $1,670
25% on the income between $67,900 and $137,050; plus $9,350
28% on the income between $137,050 and $208,850; plus $26,637.50
33% on the income between $208,850 and $372,950; plus $46,741.50
35% on the income over $372,950; plus $100,894.50
ETA: I realize it’s a little bit more complicated than this for actual tax purposes with the alternative minimum, deductions, and all that jazz. So if you want to get fancier, feel free. But I thought I’d keep my request basic.
You haven’t deigned to tell us what country you live in. Between the “federal”, the “math” rather than “maths”, and the unspoken assumption that everyone who can read your post is from the same country you are, I’ll guess you are from the USA, yes?
But if you need to find a financial advantage in it before you get married, then don’t. Just don’t.
I forget my location no longer shows. I’m in the US (though I wasn’t aware that even the math is different here). I’d be interested in knowing whether other countries have a marriage penalty.
As to considering these issues, my title is partly facetious. But in truth, it is in the back of my mind. I could really care less whether the state recognizes my commitment to my partner. She is similarly indifferent to whether government bureaucrats sign off on our relationship. We can make a lifetime commitment without filling out any state documents. And we can contract for most of the stuff we want out of state recognition of our marriage. So if we’re going to officially register our relationship to the powers that be, it makes sense to do so only if the benefits outweigh the costs.
If maximizing tax savings is your goal, I’d start by getting to know a tax professional. A CPA or EA should be familiar with the kind of questions you have and will probably have software designed to help project taxes.
I’d recommend modeling it with a spreadsheet program if you want a DIY approach. Taxes aren’t really designed to be represented by equations and have lots of breakpoints. You’ll want to make sure to deduct standard/itemized deductions, personal exemptions and any adjustments that apply to your situation to make sure that you’re really looking at taxable income and not just gross income.
Don’t forget about the implication of gift taxes. A husband and wife can freely transfer assets between each other without any limits, but two unmarried individuals can only transfer $12,000 per year. That’s particularly relevant if you change the ownership on a house or car.
Also, it’s very hard to predict the future tax situation right now. Several credits or deductions were slated to expire over the last couple of years and most have been extended. With the current focus on taxpaying families under $250k in income, I think it’s a safe bet that Congress will fix up anything that would recreate a marriage penalty.
I don’t know what it means for something not to be designed to be represented by equations. In this case, is x if my income, y is my spouse’s income, and z is the difference between the total tax if we paid separately and the total tax filing jointly, there is a discrete z for every x-y pair. Right? So isn’t this graphable as a 3-D representation?
I’ll be a contrary voice and say that what you’re trying to do is perfectly reasonable as a general guideline. (That is, it’s reasonable to graph a representative marriage tax penalty. I think it’s a good idea to think about finances before marriage, too, but that’s probably outside the scope of GQ.) Obviously this requires some simplifications (or tailoring of the values to a particular chosen situation); the tax code is pretty complicated.
But there’s nothing wrong with the method you suggest: compute the tax paid MFJ with income x+y, and subtract the taxes paid for singles filing with incomes x and y. Divide by x+y if you want the penalty as a rate. If you have access to reasonable mathematical software (Matlab, Mathematica, etc.; Excel doesn’t count) I can help you write code to do this.
Using the values you list in your OP (i.e., assuming that x, y, and x+y are the relevant taxable incomes*) what I find, if I’ve done it right, is that the line between benefit and penalty happens when one spouse has an income of about $50K. Above that income there is a penalty for MFJ; below that line there is a benefit. The penalty rate increases to a maximum of about 2% when both spouses earn about $175K. The benefit rate is highest, at about 5.5%, when one spouse earns very little and the other earns about $50K.
As a dollar amount, the penalty increases up to a maximum of about $15000.
Although presumably the gross incomes add, taxable incomes don’t necessarily add. Some deductions, for example, have thresholds, so they don’t add linearly.
What he means is that the tax rate you pay is not one simple linear equation. Rather, it is an equation that changes over different ranges. The percentage you pay (slope) and additional amount (offset) differ depending upon where your Gross Taxable Income falls. One line won’t do it.
Yes, it could be represented by equations, but it will be complicated. Basically each bracket will have to be adjusted.
If you have Excel (or something that can use Excel files) you can download a spreadsheet here that does the calculation. This is a direct link to the spreadsheet so you can right-click and download. Enter your income and your partners income into the yellow boxes.
On a reread of the OP I may not have provided as comprehensive an answer as what was desired.
I revised the spreadsheet (same link) as follows:
The Brackets sheet is still the same. You can still enter any two incomes and see the results.
I have added a Ranges sheet. This sheet has two values you can update: A starting figure for a range of incomes, and an increment for a range of incomes, both in yellow boxes. There is a Recalculate Taxes button. For this button to work you must allow macros to execute. This will repopulate the two tables to show total taxes for each combination of the two incomes within the given range.
I also added a Charts sheet, which shows 3D surface charts for filing single and filing jointly. First time I’ve used that type of chart; I can’t figure out how Excel applies the colors.
It appears that it is better to married at lower income ranges but the “marriage penalty” kicks in with a vengeance and rises steeply once you cross a certain threshold (no pun intended).
If you know a mathematician, you could pay for his notary license and be married my math.
Anyways, TaxACT (and probably all other equivalents) will do the comparison for you. If I am not mistaken, the free online version will offer you to make the comparison for a small extra fee. You just do the work as if you were filing jointly and it will give you the numbers for those two people filing separately (I have no idea how it splits the kids, I have never done it, just seen it offered to me as I file jointly)
Thanks Omphaloskeptic. And special thanks to CookingWithGas–those graphs are exactly what I am looking for.
I don’t think I’m reading your numbers right though. The total taxes seems to be wildly higher than it should be in the charts and graphs. Am I misinterpreting it?
Also, is there a simple way to make a third graph which subtracts the z values (or whichever value is on the vertical) in the joint graph from the single graph, showing only the penalty over various income combinations?
Thanks again. You’ve inspired me to get to understand Excel a bit better.
If you are using tax preparation software, you should be able to create some dummy returns to try out different scenarios (mine allows any number of them, as long as you don’t print or e-file the final result).
As to the idea of not marrying due to financial penalties, Mrs. B and I considered ourselves married from Day 1, but didn’t actually do the formal legal bit until 10 years later when Revenue Canada changed the tax code to treat common-law marriages the same as legal marriages for tax purposes. (There were essentially no disadvantages of a common-law marriage over a legal one for us, so the tax advantage was worth while. Ontario, Canada, so YMMV depending on local law/tax codes.)
Incorrect. Let us assume we have two people, one earning $200000 and the other earning nothing. They will be much better off tax-wise by filing MFJ than both filing Single.
There is no “marriage penalty”. But yes, if you have two people, each earning about the same fairly decent income, then sure, they could save often by filing Single instead of MFJ. OTOH, if one earns a LOT less that the other, then MFJ saves .
But of course there are things like buying a home, health insurance, kids and other reeasons why a couple joined together anyway shoudl consider being legally married.
It’s not a problem for me to calculate the result given any sample income. That’s just simple arithmetic. The goal of this thread was to create a representation (ideally a visual one) of the penalty across a range of possible incomes.
I was actually looking at the possibility of domestic partnership. Thanks to the feds discriminating against the gays, they wouldn’t recognize our partnership for tax purposes, but we would still get most of the state law benefits of marriage. It requires same-gendered couples in some states, but not all of them.
Yes, it should really be called a feminism penalty, since it burdens primarily those couples in which the woman earns the same as the man. (Obviously it is a benefit to stay-at-home Dads too, but the percentage is much smaller.)
Kids are a big reason to get the state marriage. But if you don’t have kids and both spouses are employed in good jobs, there actually aren’t that many benefits that cannot be independently contracted. On homebuying, if anything there is a penalty because you cannot just use the highest credit score of either spouse, you have to combine them. And there are other penalties as well. From what I can tell, you pay more on car insurance if you’re married and one spouse doesn’t drive because it is assumed that both people will drive the car.
There are some benefits that cannot be contracted–mainly visitation rights. But they are pretty few, I think.
ETA: It is especially helpful when both spouses are attorneys, otherwise I imagine the contracting for all other rights might cost more than the marriage penalty.