Anachostic

These are some things always dear to my heart.  Let’s see how the marriage penalty works out for 2010.  The marriage penalty is when you get bumped to a higher tax bracket because of your combined income, where if your income was not combined (i.e. single), you’d be in a lower tax bracket.  Obviously this is more for DINKs and working professionals.  There’s plenty of cases where one’s higher income can be strategically lowered by a non-working or low-earning spouse.

Just as a disclaimer, all of these values are taxable income (one step beyond adjusted gross income and two steps beyond earned income), even when I talk about how much someone makes a year.  As we know, there are many ways to reduce that number including 401k/IRA contributions, and other pre-tax deductions.

Back in 2008, it worked out like this, using the tax rates from that time:

2008 taxes

Filing Single Status

10% on income between $0 and $8,025
15% on the income between $8,025 and $32,550; plus $802.50
25% on the income between $32,550 and $78,850; plus $4,481.25
28% on the income between $78,850 and $164,550; plus $16,056.25
33% on the income between $164,550 and $357,700; plus $40,052.25
35% on the income over $357,700; plus $103,791.75

Married Filing Jointly or Qualifying Widow(er) Filing Status

10% on the income between $0 and $16,050
15% on the income between $16,050 and $65,100; plus $1,605.00
25% on the income between $65,100 and $131,450; plus $8,962.50
28% on the income between $131,450 and $200,300; plus $25,550.00
33% on the income between $200,300 and $357,700; plus $44,828.00
35% on the income over $357,700; plus $96,770.00

If a couple each make between $66k and $78k and they each file single, each are taxed at 25%. If they file jointly, they are bumped to 28% because their sum income is over $131k.   In this case, it makes financial sense to remain single.

This terrible loss of money occurs because of the quicker jump from 25% to 28% for married filers.  The 25% bracket ends $26,250 sooner when you are married.  Why?  Who knows.

So to figure out who gets screwed, you look at the 25% tax bracket upper bound for both single and married, because that’s where it becomes unequal.  Divide the married tax bracket value by 2 as if you were single.  That comes out to $65,725 (or $66k) and the single upper bound is $78,850 (or $78k, estimating is fine when dealing with these concepts).

How have things changed in two years?

2010 taxes

Filing Single Status

10% on income between $0 and $8,375
15% on the income between $8,025 and $34,000; plus $837.50
25% on the income between $34,000 and $82,400; plus $4,681.25
28% on the income between $82,400 and $171,850; plus $16,781.25
33% on the income between $171,850 and $373,650; plus $41,827.25
35% on the income over $373,650; plus $108,421.25

Married Filing Jointly or Qualifying Widow(er) Filing Status

10% on the income between $0 and $16,750
15% on the income between $16,750 and $68,000; plus $1,675.00
25% on the income between $68,000 and $137,300; plus $9,362.50
28% on the income between $137,300 and $209,250; plus $26,687.50
33% on the income between $209,250 and $373,650; plus $46,833.50
35% on the income over $373,650; plus $101,085.50

Well, for one, the gap has gone from $26,250 to $34,550, so many more people are going to be affected.  Great.

Using the simple formula explained above, a couple – each earning between $68k and $82k – will get bumped into the 28% tax bracket.  That’s a $14k range, compared to a $12k range back in 2008.

What does this mean in real dollars? If you make $68k and file single, your tax obligation is $13,188.  If a couple each earn $68k, combined to $136k, their married tax obligation is $30,389, or $15,194 each.  This is a loss of $4,000 just for being married.

Let’s look at the high end.  If a couple each earn $82k, filing single costs them each $16,688.  Filing jointly, their tax bill is $39,630, a loss of $6,200.

I’ll reiterate, these number are all taxable income numbers. If you’re resigned to being in the 28% bracket, don’t bother worrying.  But if you have the chance to increase your deductions to get yourself into the 25% bracket, don’t let yourself get pushed back up and lose thousands for the privilege of being married.