Individual Income Taxes were (re)born in 1913, having appeared briefly (1862 – 1872) to finance the Civil War, and again for one year in 1894, when the tax on income was found unconstitutional. Hence, the 16th Amendment (allowing an income tax) was permanently installed in 1913, and the rest is history.
Over decades of change, the U.S. Tax Code has become an ever-morphing leviathan, consuming increasing portions of our earnings and investments. While the term “fairness” is abused in discussions of the Code, we could improve actual fairness with some changes. Today, we look at the so-called “Marriage Penalty,” which taxes Married Filing Jointly (MFJ) relatively higher than Single Filers (SF).
Based on the Equal Protection clause in our Constitution (14th Amendment), any tax system should treat singles the same as married couples under the Code.
A few of the ways they aren’t equal today include:
- Mandated Federal Tax Withholding (FICA and Medicare) are applied to each earner, forcing a working couple to double-pay, while a family with one worker, with the same earned income, pays only once. (The non-working spouse is benefit-eligible based on the working spouse.)
- Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), State and Local Tax Deductions (SALT) were unlimited, but under TCJA, the maximum deduction is $10,000 annually, whether for MFJ or SF. (MFJ should be $20,000 to be equalized.)
- Additional Medicare Tax (0.9%) applies to incomes above $200,000 for Single, but only $250,000 for MFJ, short of equality by $150,000.
- Medicare premiums in addition to the base rates (called IRMAA, for Income-Related Monthly Adjustment Amounts), are applied to the top 2 income brackets disproportionately by $250,000 for MFJ.
- AMT (Alternative Minimum Tax) exemptions apply to singles up to $85,700, but only up to $133,300 for MFJ, $38,200 short of parity.
- Long-term Capital Gains and Qualified Dividend Tax rates at the 15% rate apply to Single filers up to $492,000, whereas MFJ rates apply only up to $553,850, short of parity by a whopping $430,150.
- IRA deductibility phases out for Single Filers at $87,000, but only at $143,000 for MFJ, short of parity by $31,000.
- Roth IRA contribution eligibility phases out at $161,000 for single, but only $240,000 for MFJ, short by $82,000 of being equal (and fair)
When Congress, along with our future president, will begin to rid us of the income tax Marriage Penalty once and for all, the Van Wie Financial Hour and this Blog will report on the progress. Don’t hold your breath.
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