1Marriage Tax Bonus/PenaltyWhat is it?z “The marriage tax penalty results when a married couple pay more taxes by filing jointly than they would pay each spouse could file as a single person. A marriage bonus results when a couple pays less taxes than they would as singles. Marriage penalties only result when both spouses have earned income. Single earner couples never pay a penalty and in fact always get a bonus from the tax code.”Historyz Pre-1948 personal income tax in the United States was mostly marriage neutral, with the exception of some community property states{Marriage neutral was accomplished by each individual filing personal income tax{Marriage bonus in community property states due to income splitting History Con’tz Revenue Act of 1948 {All families were extended the principle of income splitting{This created a significant tax cut for most married couples{Single tax payer’s penalty z 1951 – The single heads of house hold schedule was created{An attempt to address the inequity between married and singleTax Reform Act of 1969z 1969 single tax payers paid 42 percent more federal taxes than a married couple with the same incomez Tax Reform Act of 1969{Created the single tax payers tax schedule to address the large disparity {The intent was to keep the married and single tax burden within 20 percent of each other Tax Reform Act of 1969 Con’t{No change to married person tax rate, but their relative position worsened{This change is what later created the advantage of being single vs. married2Other Tax Actsz Economic Tax Recovery Act of 1981{Lower-paid spouse was given a 10 percent tax on income up to $30,000, with a max of $3,000zThis allowed the lower paid spouse to pay less in taxes. z Tax Reform Act of 1986 {Sharply reduced the tax rate for all and reduced the number of couples suffering from marriage penalty EITCz Expansion of Earned Income Tax Credit (EITC) in 1993{ EITC z Largest cash assistance program in the U.S.z Provides subsidy up to $4200 for single-parent families that earn less than $33,700z Married parents receive benefits until $34,700{ Over time this created a worsening of the marriage penalty by: z Phasing out the EITC due to increases in incomez Maximizes for those with 2 children- no additional credit available for 3 or more childrenEconomic Growth and Tax Relief Reconciliation Act of 2001 z 2001 Tax Act (EGTRRA){Created a new 10% tax rate - Income bracket is twice that of single tax payers {Doubled the standard deductions for non-itemizing couples{Will be implemented gradually until 2009{Doubled the income for married in the 15% bracket {No change for dual earner households making combined $114,650 per year 2001 Tax Act Con’tz With the Child Tax Credit, you may be able to reduce the federal income tax you owe by up to $1,000 for each qualifying child under the age of 17. z Child tax credit begins phasing out starting at:{Married: >$110,000 {Single: >$75,000 {This created another marriage penalty Why do we need to change the tax policy for married couples?z To accommodate changes in family structure and social shifting{Increase in two-earner households{Increase in cohabitating couplesDual-Income Householdsz Increase in dual-income households{More women are workingz1950 1 out of every 3 women in labor forcez1998 3 out of every 5 women in labor force{The higher the secondary income the more likely a tax penalty will be facedzBecause of being pushed into a higher tax bracket3Dotted line= before 2001 tax reform; Gold line=after 2001 tax reformDual Income Families Before 2001z Lower paid spouse was taxed at the higher paid spouse’s marginal tax ratez For example:{Fred makes $40,000/yr and Alice earns $20,000/yr. As individuals they would be placed in the15% tax bracket. But when filing jointly their combined incomes ($60,000/yr) will push their earnings over $42,350 up into the 28% tax bracket.Dual “Equal” Incomes Before 2001z Single John earns $25,000/yr and single Betty earns $25,000/yr. In this situation each would be placed in the 15% tax bracket. If they get married their annual income will be $50,000/yr. Therefore they will be pushed up into the 28% bracket for their income greater than $42,350.Effect on Singles Before 2001 z Two single people could take a standard deduction of $3,700 each for a total of $7,400z Married couples were limited to a standard deduction of $6,200z Now the standard deduction for married couples has increased to $8,800 and the 15% income bracket has been to $52,5004Not Always A Penalty Before 2001z Families in which there was one earner were benefiting.z If a Jerry earns $50,000/yr he is taxed at the 28% bracket on approximately half of his income and at the 15% for the rest of his income. If he marries Jane, who doesn’t work $42,350 of their income will be taxed at 15% instead of almost half their income taxed at 28%.Who was Benefiting Before 2001?Who was Being Penalized?Marriage Penalties and SubsidiesAGI of One SpouseAGI of otherSouse 0 20,000 40,000 60,000 80,000 100,000 150,000 200,000$0 -833 -1,834 -3,764 -4,113 -4,713 -6,119 -7,197$20,000 209 -122 -471 -915 -1,800 -1,644$40,000 1,477 1,477 1,284 1,284 1,477 1,866$60,000 1,633 1,884 1,884 3,388 3,777$80,000 2,135 2,712 4,950 5,339$100,000 3,946 6,261 7,155$150,000 9,082 10,664$200,000 12,705Cohabiting Couplesz Increase in cohabiting couples{ According to the 2000 Census Bureau, 11 million people lived with an unmarried partner in the U.S. A tenfold increase since 1960{ Living in similar situations as married couplesz Creates inequity between cohabitating and married couplesz Cohabitating couples benefiting tax wise{ Economy of scale originally used to justify marriage penaltyz Applicable to situations other than marriagez Outdated method with change in social dynamicHow Cohabitation Creates Inequityz A married couple is treated as one tax unit while cohabitating couples are treated as two tax unitsz This results in different amounts of adjusted gross income (AGI)z Example for cohabitating couples with children{ One filing unit (one adult & children) can deduct $7,000 from their AGI while the other filing unit (single adult) can deduct $4,750, a combined deduction of $11,750z If this couple was married, they would be treated as one filing unit and could deduct only $9,500Social Support for Policyz Needed to change tax policy to reflect support of family and marriage{Research shows that two-parent family is ideal{Married couples more