Married top earners to pay most in taxes

Higher rates kick in only $50,000 above singles’ threshold

Bloomberg NewsJanuary 21, 2013 

It pays to be single – that is, when it comes to high earners’ tax bills.

U.S. taxpayers with income of more than $200,000 a year will see federal tax rates rise this year on wages and investments. Tax increases will pinch married couples faster than individuals, especially if both spouses work and have capital gains and dividend income, said Joseph Perry, partner-in-charge of tax and business services at the accounting firm Marcum LLP.

In the law passed Jan. 1, multiple thresholds for higher rates kick in for married couples only $50,000 above where they hit for singles.

Married taxpayers with income of at least $300,000 also face limits on the value of deductions and personal exemptions that were reinstated for 2013.

“If they’re sending a message, it’s not to be married,” Perry said of U.S. tax policy. “People who are married, working, earning two good salaries, are being penalized.”

The budget deal struck by Congress and new taxes stemming from the 2010 health care law are exacerbating the long-established marriage penalty for high earners. The added bite will affect taxes they pay for 2013, and not the current filing season that starts this month.

Accountants and wealth advisers are recommending that high earners start planning and strategizing about how they recognize income from investments or when they take deductions.

Three thresholds are now in effect at which higher taxes can affect top earners. Taxable income exceeding $450,000 a year for married couples and $400,000 for singles is the crossover point to the top income-tax bracket of 39.6 percent, from 35 percent, and the 20 percent rate for capital gains and dividends, compared with 15 percent.

The second threshold starts at adjusted gross income of more than $250,000 for married couples compared with $200,000 for individuals. Those are the markers for a new 3.8 percent surtax on investment income and a 0.9 percent added levy on wages starting this year. Both were enacted in 2010 to help finance the expansion of medical coverage.

Limits on the value of deductions and personal exemptions start at a third level: $300,000 a year for married couples and $250,000 for individuals.

Consider a couple living in New York state with each earning $280,000 in annual wages – for a combined $560,000. The couple will pay about $22,000 more in taxes this year if they are married filing jointly than if they were single, according to an analysis by Perry. That assumes each of them has $20,000 in capital gains and dividends as well as $35,500 each in deductions for charitable contributions, mortgage interest and real estate taxes.

As a married couple, more of their income is subject to the phase-outs on personal exemptions and limits on itemized deductions as well as the higher taxes on wages and investment income from both the health care law and budget deal.

“They made it worse because of where they set the brackets,” Perry said of the marriage penalty as it applies to high-earning married couples.

That’s because the thresholds for individuals and married couples at the higher rates are close together, said Scott Kaplowitch, a partner at the Boston-based accounting firm of Edelstein & Co. LLP.

“$50,000 isn’t really a big spread,” Kaplowitch said. “People may just cohabitate because it’s better from a tax perspective.”

Penalties – and bonuses – for being married or single have existed in the tax code for decades because the system is based on household income and the rates vary, said Eugene Steuerle, co-founder of the Washington-based Tax Policy Center.

The option for a married couple to file separately rather than jointly is still generally more expensive even with the higher rates, said Marcum’s Perry. And while couples face a marriage penalty, advisers aren’t seriously recommending divorce for tax reasons.

Some tax-conscious high earners who haven’t yet married may see staying single as a way to avoid the penalty.

Steuerle, though, says there are other financial advantages to marriage such as the way Social Security benefits are structured.

“People who are less concerned about the formal marriage now have more ability” to avoid the penalty, he said.

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