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How to avoid the marriage tax penalty


SmartAsset: What is the marriage tax penalty and how to avoid it

SmartAsset: What is the marriage tax penalty and how to avoid it

Marriage is what binds us together, but with marriage obligations comes legal and financial responsibility. That includes taxes, and more specifically, the potential for marriage tax penalties. This means that as a couple, you will have to pay more in taxes if you file separately. Below, we look at what the marriage tax penalty is, what it might mean for you, and how you can avoid it.

You can also work with Financial Advisor who can prepare your finances for any potential unexpected expenses or possibly reduce your potential tax bill.

What is the Marriage Tax Penalty?

The marriage tax penalty occurs when a couple is subject to a higher tax rate when filing jointly than when they file separately. The reason for this punishment is that state and federal tax bracket does not always double the single income rate for couples filing together. This is especially the case withhigh-income-person who are earning the same amount.

The Employment Law and Tax Cuts 2017 changed the brackets to lessen the penalty. However, you may still have to pay a marriage tax penalty if you and your partner are earning more than $647,850 from your 2022 taxes.

Where this penalty is more common is the state tax and they are not the same. 15 states have some form of marriage penalty built into their income tax bracket structure, with only certain brackets subject to penalties. As of 2022, these states are:

  • California

  • Georgia

  • Maryland

  • Minnesota

  • New shirt

  • New Mexico

  • New York

  • North Dakota

  • Ohio

  • Oklahoma

  • Rhode Island

  • South Carolina

  • Vermont

  • Virginia

  • Wisconsin

On top of that, Washington state imposes a capital gains tax with a threshold of $250,000. This tax is levied on income over $250,000 regardless of whether you file it individually or jointly.

What is the marriage tax bonus?

One marriage tax bonus occurs mainly in households where one person earns most, if not all, of the income. Via joint payment, they qualify for a lower tax bracket than they would if they were a single filer. This bonus is an opposite scenario to the marriage tax penalty.

For example, let’s say you and your spouse filed $110,000 in income for 2021, which puts you in the 22% tax bracket. $90,000 of which is your income. If you’re an applicant with $90,000, you’ll be in the next higher tax bracket, at 24%.

What the marriage tax penalty could mean for you

SmartAsset: What is the marriage tax penalty and how to avoid it

SmartAsset: What is the marriage tax penalty and how to avoid it

Let’s look at a concrete example to show you how much a marriage tax penalty you might have to pay. To keep things more common, we’ll use the Federal tax bracket, even if it only applies to the top income bracket. For this example, Let’s say you and your spouse have a joint income of $1,000,000 in 2021.

Use our handy Federal income tax calculator, you can see that $1,000,000 results in an estimated $297,236 in federal taxes (excluding deductions). Let’s say $500,000 of that is your income and $500,000 of that is your spouse’s. If you are unmarried and filing single, the estimated total tax burden would be $290,304, a difference of almost $7,000.

In a state like New York, you may be charged 6.85% for a joint deposit of $323,201 or more. The application limit for this bracket is $215,400. If you and your fiancé make $200,000 each, you can expect a price hike when you get married.

How to avoid the marriage tax penalty

As the saying goes, there are two certainties in life: death and taxes (but not always death tax). Unlike death, taxes can often be avoided or offset. As stated above, only 15 states have such a penalty in their state taxes with no way to avoid it other than moving.

Seven other states, along with Washington DC, have marriage penalties included in their tax brackets, but they allow couples to file separately on the same return. Including:

  • Arkansas

  • Delaware

  • Iowa

  • Mississippi

  • Missouri

  • Montana

  • West Virginia

You cannot avoid the marriage penalty because submit separate returns. This will usually cost you more in taxes. So if you’re in a situation where you’ve suffered a marriage penalty and can’t avoid it, the best thing you can do is make up for it. You may want to start by looking at itemized deductions. You can deduct typical things like mortgage interest and hustle expenses to lower your tax bill. If you have any questions, you should Contact a financial advisor.

Other tax implications of marriage

In addition to the marriage tax penalty, couples should consider the other tax implications of marriage, especially if they have comparable incomes. Any tax bracket, rebate or refund that does not double the income limit when filing a single-to-joint application may be subject to this. For example, Medicare Tax increases for single filers at $200,001 and for generic filers to $250,000. A couple will soon be subject to this additional tax. It is important to work with a tax professional if you are concerned about how much extra tax you may have to pay annually.

Key point

SmartAsset: What is the marriage tax penalty and how to avoid it

SmartAsset: What is the marriage tax penalty and how to avoid it

The Tax Cuts and Jobs Act of 2017 eliminated the marriage tax penalty on federal income taxes for all but the highest earners. However, income bracket penalties exist at the state level for 15 states. If you live in one of these states and want to avoid it, you’ll need to relocate, which can cost more than taxes or offset by deduct. Either way, you’ll have to pay your share of taxes but can reduce that bill with proper preparation.

Tax planning tips

  • Reduce your tax liability by working with a financial advisor. Finding a qualified financial advisor is not difficult. SmartAsset’s free tool compare you with up to three financial advisors serving your area, and you can interview your mentors for free to decide which is right for you. If you are ready to find a mentor who can help you achieve your financial goals, start right now.

  • Do pay your taxes simple and easy using electronic filing service. TurboTax is one of the most popular tax preparation services for a reason: it consistently receives high ratings, and customers return year after year.

  • The best thing about tax season is getting a tax refund. See if you will receive a check or pay with SmartAsset’s tax calculator.

Image credits: © iStock.com / FG Trade, © iStock.com / katleho Seisa, © iStock.com / whitebalance.oatt

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