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'Penalty for marriage': how a change in marital status affects taxes

While many couples see their tax bills diminish after they get married, some face a “marriage penalty,” meaning they pay more taxes than if they were not married and registered as individual taxpayers. Why is this happening and what to do about it, says CNBC.

Photo: Shutterstock

“In some cases, getting married can save you money, and sometimes it costs money,” said certified financial planner Jeffrey Levin.

Typically, a marriage penalty occurs when tax thresholds and deductions or credits are more than double the amount allowed for individuals. Therefore, newlyweds sometimes feel that a larger tax bill is an unwanted side effect of marriage.

For marriages that were formed in 2020, you will need to file your 2020 tax return together as a married couple.

The Internal Revenue Service (IRS) will begin accepting tax returns on February 12th. The agency expects more than 150 million tax returns to be filed this year, with the vast majority by April 15th.

Here's what you need to know about marriage fines.

Higher income couples

A larger tax bill can come for high income couples.

For 2020 returns, the maximum federal rate of 37% is effective on taxable income of $ 518 for individual applicants. However, for married couples filing together, this rate applies to income of $ 400 and above.

On the subject: Tax season 2021: key dates and IRS recommendations

“For married couples filing joint tax returns, all tax rates are exactly doubled except for the maximum rate,” said Erica Yorke, economist at the Federal Tax Fund's Tax Policy Center.

For example, two people, each with an income of $ 500, will pay the second highest rate, 000%, if they file as an individual taxpayer.

However, as a married couple with a combined income of $ 1 million, they will pay 37% of $ 377 (the difference between their income and the threshold of $ 950 for the maximum rate).

There are other provisions in the tax code that can often have more impact on those with higher income when they get married. For example, while an individual payer can receive wages of up to $ 200 before the 000% surcharge on Medicare comes into effect, the cap for married couples is $ 0,9.

Likewise, the income threshold for investment income tax of 3,8% does not double. An individual taxpayer with income above $ 200 pays this tax, and married couples who apply together pay it if their income exceeds $ 000. The tax applies to things such as interest, dividends, capital gains, and rental income or royalties.

Low income

For people with low incomes, the marriage penalty can be obtained through a tax credit.

Credit is usually granted to working taxpayers with children if they meet income limits and other requirements. Some low-income people with no children are also eligible for it.

Because it is reimbursable, it is considered valuable to working low-income parents.

However, the income limits for tax credits are not doubled for married couples.

State taxes

Fifteen states also have marriage penalties for taxpayers. For example, for 2020, the Maryland maximum rate of 5,75% applies to income above $ 250 for individual taxpayers and over $ 000 for married couples.

In some states, married couples are allowed to file a separate return to avoid fines and loss of loans or benefits.

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“This is a workaround from a fine that would otherwise have been,” York said.

Social Security Income

If you are retired and already receiving Social Security, be aware that getting married can have additional tax implications.

For individuals, if your total income, tax-free interest and half of your Social Security benefits are less than $ 25, you do not have to pay taxes on those benefits. However, for married couples filing a joint return, this threshold is $ 000.

Also, if you or your new spouse deposited into traditional retirement accounts or IRAs in 2020, take a look at how much you are investing in these IRAs. There are restrictions that apply to deductions and contributions.

The Tax Policy Center has marriage calculatorwhich allows you to enter each spouse's details about their financial life: wages, business income, children they consider to be dependents, etc. So you can see how your taxes will be generated when you apply as a married couple.

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