US income tax: is there really a "marriage penalty", or do married couples pay less?

In debates about taxation, I have heard the phrase “marriage penalty” a lot. But in conversations about same-sex marriage, I keep hearing about same-sex couples having to pay more in taxes because of their marriages not being recognized. Supposedly, a few companies have even taken to paying them extra in wages to make up the difference. So, which is it?

Never heard of a ‘marriage penalty’ and we pay less taxes as a married couple than we would filing singly. Maybe those in a different tax bracket have a different experience.

When people talk about the “marriage penalty”, they are talking about certain possible situations where a married filing joint taxpayers pay a higher federal income tax rate on their income than if each person in the marriage were still single and filing 2 returns. This “penalty” does not affect all married filing joint taxpayers, only ones in certain situations - namely where both spouses work and each individually and together make certain amounts.
If you look at the 2011 federal income tax tables, you will notice for the lowest 2 brackets, the 10 and 15% brackets, the taxable income amounts that fall into those brackets for married filing joint taxpayers are exactly double those for single taxpayers. However, once you reach the 25% bracket and above, the amounts that fall into those brackets for MFJ taxpayers is less than double as for singles.
Therefore you run into examples such as a married couple where both spouses work and each makes $100,000 per year for a total of $200,000. Lets assume their itemized deductions, exemptions, and adjustments add up to $40,000 (with half attributable to each) reducing their taxable income to $160,000. Looking at the brackets for 2011, almost $21,000 of that amount is taxed at 28%.
Now lets assume those same taxpayers were single. Each of their taxable incomes would be $80,000, and none of that would fall into the 28% bracket. It would all be taxed at 25% and below which would result in a lower combined tax burden than if they were married.
When situations like this arise, people refer to it as the “marriage penalty”.

This is usually referring to what the IRS calls “imputed income”.

For example, many companies provide benefits to employee families, like medical of dental coverage, child care coverage, term life insurance, allowing spouses to come to company events or trips, sick leave to care for a spouse or child, etc. For opposite-sex couples, these are considered normal employment benefits and have no tax implications.

But because of the Federal DOMA law, the IRS says they can not allow these for same-sex couples. So the value of any such benefit provided must be reported as ‘imputed income’, and is taxed by the IRS for same-sex couples & their families. This can increase their ‘taxable income’ by several thousand dollars, and can put them into a higher tax bracket.

It is this difference in tax treatment for same-sex couples that some companies try to equalize, by paying them additional money to cover the increased taxes that opposite-sex couples do not pay.

There is a second marriage penility. Assume a coule living together and one or both have children, each having the same income after deductions. When they file they one or both can file single head of house hold. Now if they marry they can only file married joint or married single and loose the head of house hold advantage.

At least when I was still in the US, a couple whose income was the same could file jointly and take the standard deduction or file separately and each take half the standard deduction. If they were unmarried, they could each take the whole standard deduction.

I’m not following this exactly, lets say my friend is allowed to bring a guest to his company picnic and he chooses me. Why would I have to file this as imputed income on my taxes?

If the feds don’t recognize you as a married couple, how come the gift exemption doesn’t apply?

I assume your friend would have to pay taxes on the “cost fo guest” portion of your free picnic… not that I have ever heard of anyone having imputed income for something like a free picnic. I beleive “materiality” comes into play, if the amount is too lwo why bother trying to account for it. Nobody tallies up the donuts provided on some occasions or meetings and demands you pay an tax on an extr 50 cents…

However, if there is a gift or benefit to spouse of an employee, for a decent amount, then it is taxable income/benefit. Ditto for free sports event tickets, etc. Don’t see why spouses would be more exempt than non-spouses…

The standard deduction is doubled for married couples.

Or as single head of house hold.

That’s true for the last decade. Before that the standard deduction for a married couple was less than double that of a single person. That’s where a large part of the “marriage penalty” came from.

In the late 90’s the CBO estimated that the average marriage penalty was about $1400 and roughly half of all married couples “paid” one. Since the standard deduction was “fixed” in 2003 the marriage penalty has been very small compared to this and is mostly a result of marginal income being in a higher tax bracket.

However this “fix” of the standard deduction was part of the “Bush Tax Cuts” so if they are allowed to expire at the end of this year the marriage penalty will reappear.

md2000 is right – the IRS doesn’t worry about such low amounts. But employee benefits like medical & dental coverage can easily add up to tens of thousands of dollars in a year. More if it includes spouse & dependent coverage.

But I think he’s wrong in the second point. For example, spouse & dependent medical coverage in NOT considered income to them – family coverage is done for the peace of mind of the employee, and is considered part of their compensation. And such benefits are not taxed as income (except for gay couples).

This has led to some tax dodges, where companies try to sneak extra, untaxed income to employees (usually executives) by padding benefits. The IRS responds to this by writing specific rules to catch this. Thus life insurance over $500,000 is taxable income. Or a company-provided car: if you use it for personal purposes, you are supposed to keep track of those miles and report them as taxable income.