Over the last couple of weeks we’ve been talking about the Bush Tax Cuts and the different aspects that could affect your tax filing next year. This article is our final article in the Bush Tax Cut series. Check out our blog to view the entire series. Or download our free content offer for even more detials on the Bush-era tax cuts.
The Marriage Penalty was originally instituted to offset what was then a gap of the taxes that couples pay compared to the taxes that single filers pay. In 2001 President Bush instituted a Marriage Penalty Relief Act which gradually increased the standard deduction for a married couple filing jointly to twice the standard deduction for an unmarried individual filing single. The Tax Relief Act of 2001 also increased the income tax bracket of 15% for a married couple filing a joint return to twice the single filing tax bracket.
What does that mean?
This means that under the 2001 Tax Relief Act married couples were temporarily given a break from the penalty they paid because of the two incomes rather than one. This relief was given in a gradual increase of the standard deduction and an increase in the married filing joint tax brackets.
How will things change?
When the Bush Tax Cuts end the marriage penalty will come back into play. Specifically the standard deduction for married couples will be reduced to 167% from 200% of the deduction that single filers pay. The limit of the 15% bracket will be lowered to $59000 instead of $70700 or the upper limit of the 15% tax bracket for joint filers is equal to 167% of the upper limit of single filers.
How can you plan for the change?
According to the Congressional Budget Office this marriage penalty will affect over 40% of taxpayers. The penalty is not inconsequential. The usual married joint-filers will pay anywhere from $1400 to $2000 in additional tax depending on their income.
The best way to plan for the change is to increase tax withholdings in preparation of paying the extra penalty at the end of 2013. Married couples can also try to balance their incomes as the higher the two incomes and the more similar the incomes the higher the penalty.