Knotted this year? Add a ‘marriage tax penalty’ to the potential cost

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If you’re happy to say “I do” this year, be aware that the IRS can be a real buzzkill.

While many couples end up paying less tax after getting married, some face a “marriage penalty” – meaning they end up paying more if they remain unmarried and pay taxes. as a single person.

Penalties can come when the thresholds for tax brackets, deductions and credits aren’t twice the amount allowed for applicants – and that can hurt both high- and low-income households. short.

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“It used to be more contagious than before [2017] “The Tax Cuts and Jobs Act,” said Garrett Watson, senior policy analyst at the Tax Foundation.

With one a record 2.5 million weddings are expected this yearNewlyweds – especially those earning similar amounts – may want to take a close look at how their married status will affect their tax situation.

For marriages that took place at any time this year, the spouses must file their 2022 tax returns (due April 2023) as husband and wife, both jointly or separately. (However, submit separate returns only financially beneficial to the spouse in certain situations.)

Here’s what to know:

For couples with higher income

Larger tax bills can come from a number of different sources for higher earners.

For 2022, the highest federal rate of 37% will generate taxable income of $539,901 for applicants. However, for married couples filing together, that rate applies to incomes of $647,851 or more.

“All [income] Watson said.

Illustrative example: Two individuals with an income of $500,000 each would fall into the second highest rate bracket (35%), if they were filing as taxpayers.

However, as a couple with a combined income of $1 million, they would pay 37% out of $352,149 of that (the difference between their income and the $647,851 threshold for a higher rate).

Other parts of the tax code can also negatively affect people with higher incomes when they get married.

For example, the regular Medicare tax on wages – 3.8%, split between employer and employee – applies to earnings up to $200,000 for single taxpayers. Anything above is subject to the additional Medicare tax of 0.9%.

For married couples, that additional tax would amount to $250,000.

Likewise, there is a 3.8% investment income tax that applies to single people with modified adjusted gross income over $200,000. Married couples must pay taxes if their income exceeds $250,000. (Taxes apply to things like interest, dividends, capital gains, and rental income or royalties.)

In addition, the state and local tax withholding limits – also known as SALT – do not double for married couples. The $10,000 limit applies to both single miners and married profilers. (Married couples filing separately receive a $5,000 deduction each.) However, the write-off only applies to itemized taxpayers.

For those with lower income

For lower-income couples, the marriage penalty may arise from the earned income tax credit.

The credit is available to working taxpayers with children, as long as they meet income limits and other requirements. Some low-income people without children are also eligible.

However, the income limit that comes with the tax relief will not double for married couples. (Please also note that the extended version of the credit, applicable for 2021, is not extended for 2022.)

For example, a single taxpayer with three or more children may qualify for up to $6,935 with income up to $53,057 for 2022. For married couples, that limit is no higher. much: $59,187.

Other things to check

Depending on where you live, there may be a marriage penalty that counts toward your state’s marginal tax bracket. For example, Maryland’s highest 5.75% rate applies to incomes over $250,000 for singles but over $300,000 for married couples.

According to the Tax Foundation, some states allow couples to file separately on the same tax return to avoid penalties and loss of credits or exemptions.

Meanwhile, if you already receive Social Security retirement benefits, getting married can have a tax impact.

For single filers, if your adjusted gross income, interest is not taxable, and half of your Social Security benefits are less than $25,000, you won’t owe tax on those benefits. . However, for married couples filing jointly, the threshold is $32,000 instead of double the amount for individuals.

Also, if you or your new spouse contribute to traditional or Roth individual retirement accounts, pay attention to how much you put into those IRAs. There are limits that apply to deductions and contributions, and income from both spouses provides for the equation.

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