Wedding Gifts from the IRS and the Disappearing Marriage Penalty

The Disappearing Marriage Penalty,new tax cuts and jobs act 2017

It may be rare these days for a prospective husband to ask for permission or a blessing from his future father-in-law to marry his sweetheart, but there’s one additional blessing that may also be on his mind: acquiring the tax blessings bestowed by the Internal Revenue Service.

Thanks to the new tax law changes found in the Tax Cuts and Jobs Act (TCJA) of 2017, that the marriage penalty, which is part of the overall tax reform package, has been largely eliminated for most people.  While not being completely removed, it is less painful – especially to those making combined incomes greater than $600,000. Married taxpayers who file jointly can now enjoy taking the standard deduction which has been increased to $24,000 and will further increase to $24,400 in 2019.

The Disappearing Marriage Penalty,new tax cuts and jobs act 2017

Making Sense of the Changes

Under the previous tax law, it was possible for people to be stung by higher taxes if they got married. That’s because in some instances, a couple with similar incomes filing jointly would jump to a higher tax bracket due to their combined income thereby incurring the marriage penalty.  In the past, marriage penalties occurred when two individuals with similar incomes married; this was true for both high- and low-income couples. But today, with the passage of the TCJA, it is now possible for all married brackets to be exactly double those of the single brackets, with the exception of the those who at the top 37 percent marginal rate. As such, marriage penalties are generally only felt at very high -income levels.

So, while this is a significant improvement, there are still some disadvantages to getting married. One of the most impactful is that when you file your taxes as married filing jointly with your spouse, you can be equally at fault for any errors and intentional omissions, as well as any additional tax, penalties and interest that arise from those mistakes.

For example, imagine your spouse forgets to report some investment income or intentionally pads deductions. When the IRS catches the discrepancy on your joint return, you’ll both be held liable. You might have had no idea it was happening, but you may still be on the hook for the outstanding balance plus interest and penalties. But it’s not all doom and gloom. Here are several reasons that married filing jointly still may be the best choice when it’s tax time:

  • A jobless spouse can have an IRAa taxpayer who couldn’t pay into an IRA when single can use the joint income to fund one and potentially put away thousands of dollars for retirement while receiving substantial tax benefits

  • Marriage can protect the estate – Being married can help a wealthy person protect the assets he leaves behind when he dies. Under federal tax laws, you can leave any amount of money to a spouse without generating estate tax, so this exemption protects the deceased’s estate until the spouse dies.

  • Filing can take less time and expense  – If the spouses have to file just one tax return, there’s a good chance that it will take less time to assemble the paperwork—at least for the one not doing the taxes—and cost less to have it prepared.

  • Couples may “benefit-shop” –    If spouses have benefit packages from their jobs, they can pick the most valuable benefits from the two plans to reap the most savings possible. For example, if a spouse can have pre-tax money deposited in an IRA, meaning the deposit reduces his taxable income, and the other spouse can’t, they can put family money into an IRA for the second spouse, too.

There are many more benefits for married couples that far outweigh the marriage penalty as it exists today. So, whether you decide to file jointly or not, keep in mind the many good reasons to get married — true love, partnership and compatibility — are still the best foundation for a happy union. In today’s ever-changing tax environment, a few extra wedding gifts are more than welcomed by newly marrieds and long-term couples after they say their “I dos.”  Next time, we’ll explore how the increase in the child tax credit will make a big difference in your 2018 tax return.

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $300,000

DATA SOURCE: JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE.

 

Bottom line: the new tax code is complex and cumbersome for business. To navigate the new legislation, you need trusted experts and advisors who understand the nuances of accounting. We are here for you! Visit us at TYSLLP.com.

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