The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: ThriftyTechie on October 06, 2015, 09:29:58 AM
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My boyfriend and I both received large pay increases this year and since we live in CA, we will both be paying AMT tax. I don't know how long we will continue to have high incomes.
Now if we were to get married, because of the way US federal tax brackets work, we would be paying thousands, maybe even $10k extra per year.
Would you pay this much to be married?
(Since we are living together, I think eventually the IRS will force us to file as married, so I don't know how long we can avoid it even if we wanted to)
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You can file separately, even when married. It's your choice.
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My boyfriend and I both received large pay increases this year and since we live in CA, we will both be paying AMT tax. I don't know how long we will continue to have high incomes.
Now if we were to get married, because of the way US federal tax brackets work, we would be paying thousands, maybe even $10k extra per year.
Would you pay this much to be married?
(Since we are living together, I think eventually the IRS will force us to file as married, so I don't know how long we can avoid it even if we wanted to)
The IRS can't force you to get married, and you can't choose to file as married unless you are legally married. So if you'd like to remain unmarried for tax purposes you are free to do so. There are other reasons people choose to marry despite the marriage tax penalty: inheritance rights, medical rights, etc. Sometimes there is a marriage tax bonus, just depends on the details.
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Since I make less than the AMT amount, I'm paying thousands a year to NOT be married. It's worth every penny.
Should I commit matrimony and add a dependent, it would reduce my tax burden substantially. But I don't think it justifies the extra nuisance of having a spouse around. I have enough drama with my teenager and don't need another mouth to feed.
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The IRS can't force you to get married, and you can't choose to file as married unless you are legally married.
This is true, but "marriage" for federal tax purposes includes, in those states where it exists, "the distinctive American concept of 'common-law marriage'" (Rebecca Probert, The Misunderstood Contract Per Verba De Praesenti *83 (Warwick School of Law Research, November 14, 2009), available on SSRN (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1504026)). See Rev Rul 1958-66 (http://www.charitableplanning.com/document/666183) (confirming that "if applicable state law recognizes common-law marriages, the status of individuals living in such relationship ... is, for Federal income tax purposes, that of husband and wife"). See also Rev Rul 2013-17 (http://www.irs.gov/irb/2013-38_IRB/ar07.html) (confirming recognition of common-law marriages as "the longstanding position" of the IRS).
That said, there is no US state where mere cohabitation can create a common-law marriage. The exact rules vary by state, but in states that authorise so-called common-law marriages, the elements are usually some variant of "(1) A present agreement to be married, (2) cohabitation, and (3) public representations of marriage". Rev Rul 2013-17, footnote 2. However, even if the parties don't explicitly say that they agree to be married, there may be indirect evidence of that; for instance, if the parties casually refer to each other as "husband" and "wife", that could be probative of whether they are married in states that authorise common-law marriage, which would in turn be relevant to whether they are married for federal tax purposes.
In conclusion, even if you have never been formally married, you may be married for federal tax purposes, in which case you are not permitted to file your tax return as a non-married person, subject to the usual exceptions. Note that not all states authorise this kind of informal marriage.
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I would pay thousands to be married to my wife. Bargain of the century.
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My wife and I started filing jointly before we actually got married (on the advice of the tax preparer we used that year). It saved us about $3K in taxes, since my wife was a 1099 and I was a full-time student.
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Of course you never want to think this way, but if you get married, you have the protections of divorce law, should things fall apart. That cuts both ways. If you both have high incomes, spousal support may never be an issue. It could matter for assets.
Is it correct to assume you are an opposite sex couple? I ask because technically any child of your union would be attitubuted to its biological father regardless of marriage. If you are a same sex couple, a child is attributed to the non-biological parent by virtue of the marriage, so if that's the case and children are in the cards, get married!
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We're in the same situation in CA, and we're not getting legally married. Had the ceremony with all the works though. We'll get married if it makes sense for some reason. For now I don't think the benefits are large enough yet.
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You can file separately, even when married. It's your choice.
This is a common misconception. Married filling separately and single have very different tax brackets. For example, the 33% bracket ends at $205,750 vs $411,50 for single. See http://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions and compare the tables.
For two high income earners, we HAVE to pay more tax if we marry.
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I would pay thousands to be married to my wife. Bargain of the century.
Applause!
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Of course you never want to think this way, but if you get married, you have the protections of divorce law, should things fall apart. That cuts both ways. If you both have high incomes, spousal support may never be an issue. It could matter for assets.
Is it correct to assume you are an opposite sex couple? I ask because technically any child of your union would be attitubuted to its biological father regardless of marriage. If you are a same sex couple, a child is attributed to the non-biological parent by virtue of the marriage, so if that's the case and children are in the cards, get married!
We totally trust each other in terms of finances, and we're both pretty well off financially, so I'm not worried about that protection.
We are opposite sex (I guess in the Bay Area, it is more common for high income earners to be gay than to be female). We do want a child at some point and that could drive the decision. I think it's still socially awkward to have kids and not be officially married these days.
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I basically did--my spouse earns very little and I am the breadwinner.
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I would pay thousands to be married to my wife. Bargain of the century.
Wins thread.
And ditto, BTW.
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
It incentivizes marriage when only one spouse earns income, and to a lesser extent when there is a large income disparity.
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In OP's situation, unless there was a compelling, non taxation-related reason to get hitched sooner than later, I would just wait it out until the incomes drop. Can't be that long with two incomes high enough to justify AMT assuming an ER pursuit.
The more interesting question would be, if you are already married, would you get a divorce to save $10k on taxes?
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
It incentivizes marriage when only one spouse earns income, and to a lesser extent when there is a large income disparity.
I see. Well, that is my situation, so I guess I'm just not close enough to see the issue. What is the alternative minimum tax in California?
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I would pay thousands to be married to my wife. Bargain of the century.
Wins thread.
And ditto, BTW.
Completely agreed.
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I basically did--my spouse earns very little and I am the breadwinner.
Wouldn't you get a tax break in this situation?
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I basically did--my spouse earns very little and I am the breadwinner.
Wouldn't you get a tax break in this situation?
Maybe s/he means s/he's subsidizing the spouse, presumably more than s/he's saving in taxes
Sent from my Nexus 4 using Tapatalk
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I would offer that this is the wrong way to think about it. Being married costs much more than just the tax penalty, there is the ring, wedding, honeymoon, kids, kids college, and there is lots of stress. If your decision is so marginal that you are worried about a few thousand in taxes, then don't get married right now. You can always change your mind when you want to have a kid.
Yeah, this is exactly what I thought when I saw this. If the tax difference makes an impact, it's not the time.
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I would offer that this is the wrong way to think about it. Being married costs much more than just the tax penalty, there is the ring, wedding, honeymoon, kids, kids college, and there is lots of stress. If your decision is so marginal that you are worried about a few thousand in taxes, then don't get married right now. You can always change your mind when you want to have a kid.
Yeah, this is exactly what I thought when I saw this. If the tax difference makes an impact, it's not the time.
If you are not religious, is there really a huge difference between being married and living common law? If you can (as a family unit) save thousands of dollars by not being married, why wouldn't you do it?
Here in Canada, married couples and couples who are living common law get very similar treatment under the tax code.
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I definitely do. Here's a handy calculator: http://www.nytimes.com/interactive/2015/04/16/upshot/marriage-penalty-couples-income.html?_r=0
And chart:
(http://i.imgur.com/yVnTU9P.png?1)
I hate to start sounding all republicany, but this is definitely contributing to my scaling back at work. My marginal rate is simply too high to justify the stress involved in working more hours.
A more accommodating tax regime would definitely increase my "productivity." But I don't believe that this type of rhetoric is true for the vast majority of people out there. Mostly for mustachians :-P
edit: by the way, this is also evidence for my theory of spousal coworking. Imagine that I married a fellow lawyer from law school (I didn't, but plenty of friends did). We could both start working independently, making say $149k each. But hey, that results in a $3,700 marriage tax penalty. On the other hand, if only one of us made $298k, that would be a $12,400 bonus -- a net difference of $16,100 per year!
So say only one of us takes the job. The work spouse farms out compartmentalized tasks to the home spouse, thereby giving us incredible productivity! We are immediately promoted and we get giant bonuses. We come out way ahead and one person gets to work from home.
Ethical issues aside, it's an idea I've had for a while. Could work equally well for engineering but it works best for jobs that have quantitative rewards for inputs (like dollar bonus per hours billed).
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In OP's situation, unless there was a compelling, non taxation-related reason to get hitched sooner than later, I would just wait it out until the incomes drop. Can't be that long with two incomes high enough to justify AMT assuming an ER pursuit.
The more interesting question would be, if you are already married, would you get a divorce to save $10k on taxes?
We have discussed it and might, though probably not for a one of $10,000 in extra tax. Once you throw minor children into the mix it gets more complicated, though. I don't want judges, etc. involved in stuff like custody issues.
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edit: by the way, this is also evidence for my theory of spousal coworking. Imagine that I married a fellow lawyer from law school (I didn't, but plenty of friends did). We could both start working independently, making say $149k each. But hey, that results in a $3,700 marriage tax penalty. On the other hand, if only one of us made $298k, that would be a $12,400 bonus -- a net difference of $16,100 per year!
So say only one of us takes the job. The work spouse farms out compartmentalized tasks to the home spouse, thereby giving us incredible productivity! We are immediately promoted and we get giant bonuses. We come out way ahead and one person gets to work from home.
Ethical issues aside, it's an idea I've had for a while. Could work equally well for engineering but it works best for jobs that have quantitative rewards for inputs (like dollar bonus per hours billed).
dragoncar, that's not quite right. You're comparing tax penalty numbers instead of total tax paid (I've made that same mistake before).
Two single people earning $149,000 each pay $63,849 in taxes total.
Two married people earning $149,000 each pay $67,130 in taxes total. (so ~$3300 marriage penalty)
Two single people where one person earns $0 and the other person earns $298,000 pay $79,033 in taxes total.
Two married people where one person earns $0 and the other person earns $298,000 pay $67,130 in taxes total.
My numbers are from http://taxpolicycenter.org/taxfacts/marriagepenaltycalculator.cfm
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edit: by the way, this is also evidence for my theory of spousal coworking. Imagine that I married a fellow lawyer from law school (I didn't, but plenty of friends did). We could both start working independently, making say $149k each. But hey, that results in a $3,700 marriage tax penalty. On the other hand, if only one of us made $298k, that would be a $12,400 bonus -- a net difference of $16,100 per year!
So say only one of us takes the job. The work spouse farms out compartmentalized tasks to the home spouse, thereby giving us incredible productivity! We are immediately promoted and we get giant bonuses. We come out way ahead and one person gets to work from home.
Ethical issues aside, it's an idea I've had for a while. Could work equally well for engineering but it works best for jobs that have quantitative rewards for inputs (like dollar bonus per hours billed).
dragoncar, that's not quite right. You're comparing tax penalty numbers instead of total tax paid (I've made that same mistake before).
Two single people earning $149,000 each pay $63,849 in taxes total.
Two married people earning $149,000 each pay $67,130 in taxes total. (so ~$3300 marriage penalty)
Two single people where one person earns $0 and the other person earns $298,000 pay $79,033 in taxes total.
Two married people where one person earns $0 and the other person earns $298,000 pay $67,130 in taxes total.
My numbers are from http://taxpolicycenter.org/taxfacts/marriagepenaltycalculator.cfm
Well being married is non negotiable in this scenario.
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If I had to literally write a check for a few thousand dollars at the beginning of the year to remain married to my husband, I absolutely would do it.
Money isn't everything and my marriage is the most valuable thing in my life.
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I would pay thousands to be married to my wife. Bargain of the century.
Wins thread.
And ditto, BTW.
Completely agreed.
Yep.
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edit: by the way, this is also evidence for my theory of spousal coworking. Imagine that I married a fellow lawyer from law school (I didn't, but plenty of friends did). We could both start working independently, making say $149k each. But hey, that results in a $3,700 marriage tax penalty. On the other hand, if only one of us made $298k, that would be a $12,400 bonus -- a net difference of $16,100 per year!
So say only one of us takes the job. The work spouse farms out compartmentalized tasks to the home spouse, thereby giving us incredible productivity! We are immediately promoted and we get giant bonuses. We come out way ahead and one person gets to work from home.
Ethical issues aside, it's an idea I've had for a while. Could work equally well for engineering but it works best for jobs that have quantitative rewards for inputs (like dollar bonus per hours billed).
At virtually all big law firms (and probably most smaller firms), the net after-tax earnings of two average-performers would exceed the net after-tax earnings of a single high-performer (at least until eligibility for partnership rolls around, by which time the dual-income couple would probably have already achieved financial independence), because, even on a pre-tax basis, there is a declining marginal utility to working additional hours.
Your idea would work best in a non-salaried job, where the quantitative rewards for inputs are on at least a 1:1 basis (i.e., where there is no declining marginal utility to working additional hours).
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I basically did--my spouse earns very little and I am the breadwinner.
Wouldn't you get a tax break in this situation?
Maybe s/he means s/he's subsidizing the spouse, presumably more than s/he's saving in taxes
Exactly. I pay less income tax, but I spend money supporting him. ;)
Regarding the OP: If you are committed to each other and are just wondering whether to take the legal step, the thing to do is run the numbers through Turbotax for each scenario. I know two couples who lived together for years and finally decided to marry purely for the tax benefit. One couple made a point of getting married on Dec 31.
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While the marriage penalty sucks and should be eliminated (as should the marriage bonus--they're both effing ridiculous), the amount of other legal protections you give up by not being married makes it not worth it, in my view, unless you seriously go and get everything locked down. Even then, there are certain things (e.g., survivorship benefits) that you just can't contract around. And I honestly do think that it's borderline-irresponsible to remain unmarried if there are kids in the mix: even if the kid won't be stigmatized for it, there are too many "bad things" that can happen.
Something else to consider--depending on where you travel in the world, not being married can be a liability, particularly if you are in highly-religious areas (e.g., middle east). Because my spouse and I do not have the same last name, we were required to produce a marriage certificate when we checked into a hotel on a recent trip. Without that, I don't think they would have let us check into the room. This is obviously a super-marginal issue, but I thought it was interesting when it happened.
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Yes. Thousands of dollars is dogshit compared to being married to my wife.
But, you can choose like a poster above to be socially married, which is the important part, and not tell the government you're married.
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edit: by the way, this is also evidence for my theory of spousal coworking. Imagine that I married a fellow lawyer from law school (I didn't, but plenty of friends did). We could both start working independently, making say $149k each. But hey, that results in a $3,700 marriage tax penalty. On the other hand, if only one of us made $298k, that would be a $12,400 bonus -- a net difference of $16,100 per year!
So say only one of us takes the job. The work spouse farms out compartmentalized tasks to the home spouse, thereby giving us incredible productivity! We are immediately promoted and we get giant bonuses. We come out way ahead and one person gets to work from home.
Ethical issues aside, it's an idea I've had for a while. Could work equally well for engineering but it works best for jobs that have quantitative rewards for inputs (like dollar bonus per hours billed).
At virtually all big law firms (and probably most smaller firms), the net after-tax earnings of two average-performers would exceed the net after-tax earnings of a single high-performer (at least until eligibility for partnership rolls around, by which time the dual-income couple would probably have already achieved financial independence), because, even on a pre-tax basis, there is a declining marginal utility to working additional hours.
Your idea would work best in a non-salaried job, where the quantitative rewards for inputs are on at least a 1:1 basis (i.e., where there is no declining marginal utility to working additional hours).
I don't think this works that way (but correct me if I'm wrong). A married couple with $298k/year in total income (filing jointly) pays the exact same amount whether that income is one person earning $298k/year or two earning $149k/year. To make the numbers simple, let's say that's $100k in taxes. What the marriage bonus/penalty numbers mean is simply that two unmarried people making $149k/year would owe only $96,300 in taxes, while a single person making $298k would owe $112,400 in taxes. Changing the income distribution within the members of the married couple doesn't influence how much tax they pay, just the number you're comparing to (how much tax they would have payed if they weren't married.)
...although I suppose going with the one person making twice as much would save money on social security taxes. 6.2% of the first $118,500 of income, so the one working spouse making twice as much would pay $7,347 in social security tax, and two spouses would owe $14,694 so allocating all the income to one person gets you more than $7,000 in tax savings. If the spouses were self-employed (which is the case in a lot of jobs where there is a close to 1:1 ratio of inputs to rewards which brooklynguy mentions above) the extra bite SS takes out of your paycheck for the first $118,500 doubles to 12.4% so you'd be saving almost $15,000 in social security tax by only have one spouse draw all the income (assuming total income for the couple is at least $237,000).
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Changing the income distribution within the members of the married couple doesn't influence how much tax they pay
I don't think anyone suggested that it does. Dragoncar's point, I believe, was that the existence of the "marriage bonus" just further enhances the benefits of his proposed strategy for a married couple to operate as (and collectively perform the work of) a single employee, because the single income earned by that super-productive "single" employee would not only be higher (on a pre-tax basis) than the dual income that would be earned by the two individuals working separately (with normal productivity), but would also receive more favorable tax treatment than it would receive if the two individuals were unmarried (unlike the dual income alternative, where the existence of the marriage penalty would cause the dual income to receive less favorable tax treatment by virtue of the marriage). And my point, in response, was just that, in practice, in a typical big law firm setting (and most other salaried employment settings), the super-productive "single" earner would actually probably not generate higher earnings than the dual earners working as separate (and non-super-productive) employees.
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Yeah it was kinda a dead end thought experiment but I'm sure I spent at least one sleepless night thinking about it (I generally spend too much time thinking about crazy ways to game the system that I will never try... Certainly if I spent that time working hard id come out way ahead :-)
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Okay, so you were saying if you'd adopted this income concentration plan, it would create tax incentives to getting married, rather than, if you were married, it made sense to adopt the income concentration plan. That makes much more sense. Apologies for the misunderstanding and absolutely nothing wrong with dead end thought experiments, they get me through boring days at the office.
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Thought experiment, could you theoretically start an LLC or something with your spouse, say consulting, both work the same billable hours, netting 200k for the year, then "pay" your spouse 50k and yourself 150k and get a tax benefit?
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse. We pay thousands more every year because we are married.
Example: If two people earn 170k and aren't married they'll each be in the 28% tax bracket. However, if they get married then they'll have a huge amount of that taxable in the 33% bracket.
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Thought experiment, could you theoretically start an LLC or something with your spouse, say consulting, both work the same billable hours, netting 200k for the year, then "pay" your spouse 50k and yourself 150k and get a tax benefit?
Since your income and your spouse are getting lumped together Federal income tax purposes, I don't think it would matter how you paid out the income earned by the LLC between the two of you. But yes, I think it'd save you a little in self employment taxes since the spouse with $150k would have maxed out their social security payments and their marginal self employment tax would drop from 15.3% (social security plus medicare) to 2.9% (medicare only) while if each spouse earned $100k they'd each pay the higher self employment tax rate on their entire incomes.
The major tax savings potential of your scenario actually come from the frankly ridiculous amount of 401k contributions possible: $18k per spouse from their salary plus the lower of 20% of income or $35k per spouse* contributed by the company. So in that example, the company could earn $200k, the couple could save 18*2 + (200*.2) = $76k and only owe income tax on $124k for the year, reducing the federal income tax they owe from ~$41k to $~20k (and maybe more in state income taxes!).
*The details: the company can contribute up to 25% of the employee's salary, but those contributions don't count as part of salary for the purposes of the calculation, so this works out to 20% of the total profits the couple's company has available for contribution. The sum of the employee contributions and employer contributions is capped at -- I think -- $53k. 53-18 = 35 left for employer contributions.
I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse. We pay thousands more every year because we are married.
Example: If two people earn 170k and aren't married they'll each be in the 28% tax bracket. However, if they get married then they'll have a huge amount of that taxable in the 33% bracket.
I agree with your example, but to clarify for those who are less familiar with this issue: If a married couple has a combined income of less than $151,200* the amount of tax they're paying is equal to what they would have paid if they were unmarried and had exactly equal incomes and less than they would have payed if they were unmarried and had unequal incomes. So if you make less than 3x the national average annual household income, being married is always either beneficial or neutral for you on tax day.
Above $151,200 in total income, the tax you pay as a married couple is both more than, less than, and equal to the amount two unmarried people would pay depending on how unequally the income was split between the two single people.
I'm sorry for the somewhat awkward phrasing in the two paragraphs above. I wanted to make it as clear as possible that how equal or unequal the incomes of the members of a married couple are doesn't effect how much income tax they owe at all, just the amount of income tax they would have payed if they weren't married.
*Until this point the federal tax brackets for married filing jointly are 2 times the tax brackets for a single person, but the 28% tax bracket kicks in at less than 2x the single bracket, as do the 33, 35, and 39.6 ones.
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I would offer that this is the wrong way to think about it. Being married costs much more than just the tax penalty, there is the ring, wedding, honeymoon, kids, kids college, and there is lots of stress. If your decision is so marginal that you are worried about a few thousand in taxes, then don't get married right now. You can always change your mind when you want to have a kid.
Getting married can cost nothing more than the marriage certificate (and time off work to go get the darn thing). The ring doesn't have to happen, and when people do choose to get them they can be any ring, not diamond. Marriage does not necessarily lead to kids. And having kids does not obligate you to save for their college. So I disagree with all of the assumptions you made above.
However, we did the big wedding and nice honeymoon and I have a ring I like and we plan to have kids and pay for their college educations. And I am thrilled with all of our choices.
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Getting married can cost nothing more than the marriage certificate (and time off work to go get the darn thing).
As mentioned in my post above (http://forum.mrmoneymustache.com/taxes/would-you-pay-thousands-a-year-to-be-married/msg829255/#msg829255), in some US states, even those costs and associated steps are not necessary. For example, the state of Texas authorises so-called "marriage without formalities", the formation of which does not require any interaction with the government whatsoever. Texas Family Code §§ 2.401 et seq (http://www.statutes.legis.state.tx.us/SOTWDocs/FA/htm/FA.2.htm#2.401).
Note: I express no view on whether anybody should make use of the statute described above or similar statutes in other states. This post also does not discuss the technical conditions described in the statute or in similar statutes, nor does this post discuss tactical, evidentiary, or other considerations associated with the choice of how to form a marriage. Consult local counsel if you require legal advice on how or whether to form a marriage.
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse.
This is exactly right. The tax code seems stuck in the '50s as if all households looked like an episode of 'Leave it to Beaver'. We might question why.
I've learned a few things over the years:
1) It doesn't always make sense to minimize taxes - there are real-life considerations that might be more important.
2) Tax laws don't have to make sense - they just need to be the law.
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse.
This is exactly right. The tax code seems stuck in the '50s as if all households looked like an episode of 'Leave it to Beaver'. We might question why.
Why should married couples get a tax advantage if both of them are similarly-high earners?
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse.
This is exactly right. The tax code seems stuck in the '50s as if all households looked like an episode of 'Leave it to Beaver'. We might question why.
Why should married couples get a tax advantage if both of them are similarly-high earners?
Why should they get a penalty?
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I'm curious how this works, because in my experience, the federal tax code is structured to incentivize marriage.
The federal tax code only incentivizes marriage if you have a stay at home or very low earning spouse.
This is exactly right. The tax code seems stuck in the '50s as if all households looked like an episode of 'Leave it to Beaver'. We might question why.
Why should married couples get a tax advantage if both of them are similarly-high earners?
Why should they get a penalty?
Took the words right out of my mouth.
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Why should they get a penalty?
They shouldn't, but, as maizeman noted in his thoughtful post in the other active thread (http://forum.mrmoneymustache.com/taxes/visualizing-how-much-being-married-saves-(or-costs)-you-in-federal-income-tax/) on this topic, there are competing objectives that are difficult, if not impossible, to simultaneously achieve, so eliminating the penalty would come at the cost of precluding one or both of those (arguably more important, and arguably less important) objectives:
I haven't been able to figure out a tax system that would be able to satisfy more than two criteria from the following list:
A) A progressive tax code where people who earn more pay a higher rate than people who earn less
B) A tax code that only considers the total income from both members of a married couple to calculate their tax liability
C) A tax code what doesn't make marriage a better deal for one person earning X dollars and one person earning $0 than for two each earning .5X dollars.
Right now we have A & B which makes it impossible to achieve C. We could eliminate the "penalty" for married people with equal incomes easily enough, but it'd have the side effect of significantly increasing size of the "bonus" for married people with very unequal incomes so the same issues with penalizing gender equality would remain.
Personally my ideal tax code would have A & C (essentially this would be as simple as eliminating the married filing jointly option and increasing the tax brackets for married filing separately to equal to those for single filers).
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Why should they get a penalty?
They shouldn't, but, as maizeman noted in his thoughtful post in the other active thread (http://forum.mrmoneymustache.com/taxes/visualizing-how-much-being-married-saves-(or-costs)-you-in-federal-income-tax/) on this topic, there are competing objectives that are difficult, if not impossible, to simultaneously achieve, so eliminating the penalty would come at the cost of precluding one or both of those (arguably more important, and arguably less important) objectives:
I haven't been able to figure out a tax system that would be able to satisfy more than two criteria from the following list:
A) A progressive tax code where people who earn more pay a higher rate than people who earn less
B) A tax code that only considers the total income from both members of a married couple to calculate their tax liability
C) A tax code what doesn't make marriage a better deal for one person earning X dollars and one person earning $0 than for two each earning .5X dollars.
Right now we have A & B which makes it impossible to achieve C. We could eliminate the "penalty" for married people with equal incomes easily enough, but it'd have the side effect of significantly increasing size of the "bonus" for married people with very unequal incomes so the same issues with penalizing gender equality would remain.
Personally my ideal tax code would have A & C (essentially this would be as simple as eliminating the married filing jointly option and increasing the tax brackets for married filing separately to equal to those for single filers).
Jut replace a) with "A progressive tax code where people households who earn more pay a higher rate than people households who earn less"
Then you can just make the married brackets and cutoff a 2x single
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Dragoncar, that's the point I was making when I said "We could eliminate the "penalty" for married people with equal incomes easily enough, but it'd have the side effect of significantly increasing size of the "bonus" for married people with very unequal incomes so the same issues with penalizing gender equality would remain."
There are two separate issues here: i) should marriage always be equal to or better than being single from a tax perspective? and ii) should couples where one spouse makes lots of money and the other little or none get a greater benefit from marriage than couples with relatively equal incomes? I understand lots of married people would argue the answer to the first question is "Yes", but the second question is the concern people raised in the other thread (the tax code penalizes couples with evenly split incomes relative to people with concentrated incomes) and that's how I defined C.
Making all the married tax brackets 2x the single ones means marriage is always better or equal than remaining single (addresses i), but it would still be the case that marriage was a much a better deal from a tax perspective for a person making $300k/year marrying a person making $0 than for two people who are making $150k/year each (fails to address ii).
If you decide the answer to question #1 is "Yes!" there are lots of ways to change the tax code to benefit married people at the expense of single people* ranging from the plausible one you suggest to something ridiculous like a special 15% payroll tax on people of legal age to be married who cannot produce a marriage certificate during the hiring process (which would also have the effect of ensuring no one would ever end up paying more tax as a result of being married). It is tackling the unequal benefits of marriage to couples with different earning splits that is really hard while keeping a progressive tax code and only considering total household income.
*If the change was meant to be revenue neutral, making all the married-filing jointly tax brackets 2x the single brackets would also mean shrinking the brackets or raising the rates, so it'd be essentially redistributing money from single people (whose taxes would have to go up) to married people making more than $172,600/year (the lowest income where the married tax brackets aren't already 2x the single brackets). If it wasn't meant to be revenue neutral, single people would be paying the same taxes they were previously for a smaller set of government services, while married people would be paying less money for fewer government services.
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Jut replace a) with "A progressive tax code where people households who earn more pay a higher rate than people households who earn less"
Then you can just make the married brackets and cutoff a 2x single
No, that would still leave unsatisfied the objective described in (C) (i.e., a tax code that doesn't make getting married a disproportionately better deal for couples with earnings concentrated in one of them than it is for couples with earnings spread equally across the two of them), which maizeman also noted in the follow-up response to his post in the other thread.
EDIT: I see maizeman also already responded and made the same point in this thread too.
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Jut replace a) with "A progressive tax code where people households who earn more pay a higher rate than people households who earn less"
Then you can just make the married brackets and cutoff a 2x single
No, that would still leave unsatisfied the objective described in (C) (i.e., a tax code that doesn't make getting married a disproportionately better deal for couples with earnings concentrated in one of them than it is for couples with earnings spread equally across the two of them), which maizeman also noted in the follow-up response to his post in the other thread.
EDIT: I see maizeman also already responded and made the same point in this thread too.
Maybe I wasn't clear in my goal. I want to eliminate the marriage penalty. We already don't have (c). Under my plan we will continue to not have (c). However, there will be no penalty to getting married vs. staying single.
Consider that (d) "don't provide a disincentive to getting married" is a far more valuable policy objective than (c)
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Jut replace a) with "A progressive tax code where people households who earn more pay a higher rate than people households who earn less"
Then you can just make the married brackets and cutoff a 2x single
No, that would still leave unsatisfied the objective described in (C) (i.e., a tax code that doesn't make getting married a disproportionately better deal for couples with earnings concentrated in one of them than it is for couples with earnings spread equally across the two of them), which maizeman also noted in the follow-up response to his post in the other thread.
EDIT: I see maizeman also already responded and made the same point in this thread too.
Maybe I wasn't clear in my goal. I want to eliminate the marriage penalty. We already don't have (c). Under my plan we will continue to not have (c). However, there will be no penalty to getting married vs. staying single.
Consider that (d) "don't provide a disincentive to getting married" is a far more valuable policy objective than (c)
Apparently a miscommunication, I thought you were arguing that in fact it was possible to have A, B, & C.
We're in agreement that D is actually a good thing to achieve although we might disagree about its importance relative to the other three. Your method (married filling jointly tax brackets = 2x the single brackets) will certainly achieve A, B, and D. I would like to point out that the solution proposed in my quoted post "eliminating the married filing jointly option and increasing the tax brackets for married filing separately to equal to those for single filers" would also achieve D (as well as A & C) but without significantly increasing the proportion of the total tax burden payed by single people. Although it's not possible to be sure without a lot more data on how common different income splits are between married couples at different household income levels, it might have the effect of increasing the total proportion of taxes payed by married people while still never creating a disincentive to marriage.
We could discuss or argue about whether it makes sense to shift taxes from one group of people to another group of people or vice versa but that gets into value judgements rather than logic and I've rarely seen it end well IRL, on this forum, or elsewhere on the internet. Let's just agree that you and I would both like to be paying less in taxes than we currently do, and we can each identify lots of people who are getting a sweetheart deal from the current tax code and should be paying more and/or lots of government spending we don't think is necessary and could be eliminated to offset the reduction in taxes we would like (although it wouldn't necessarily be the same people or programs).
I just thought the fact that it doesn't appear logically possible to achieve the three objectives I identified simultaneously was an interesting constraint on public policy that I hadn't seen discussed anywhere else previously.
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Maybe I wasn't clear in my goal. I want to eliminate the marriage penalty. We already don't have (c). Under my plan we will continue to not have (c). However, there will be no penalty to getting married vs. staying single.
True, but your plan would exacerbate our current absence of (c) by making getting married an even more disproportionately better deal for couples with concentrated earnings than for couples with diluted earnings than it is today.
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Maybe I wasn't clear in my goal. I want to eliminate the marriage penalty. We already don't have (c). Under my plan we will continue to not have (c). However, there will be no penalty to getting married vs. staying single.
True, but your plan would exacerbate our current absence of (c) by making getting married an even more disproportionately better deal for couples with concentrated earnings than for couples with diluted earnings than it is today.
(c) doesn't really bother me at all.
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It's easy not to have a problem with (c) when it doesn't harm you.
Item (c) is especially unfair as applied to single people: a single person earning certain levels of income pays significantly more tax than a person who is otherwise identical but who is married to a person who does not earn income. In effect, single people are paying higher taxes in order to subsidise married couples of equivalent income level. Under the current regime, this effect phases out at a certain threshold, but dragoncar's proposed changes would prevent it from phasing out and would be even more unfair to single people.
It's difficult to justify forcing single people to subsidise married people when you consider that being married already offers its own rewards: aside from having a constant friend and partner to share your life with, there are also numerous financial benefits (such as being able to earn twice the income without increasing expenses, thus dramatically reducing the length of the working career required to achieve financial independence). To be fair, there are also certain risks (http://forum.mrmoneymustache.com/welcome-to-the-forum/can-everyone-retire-in-6-years-if-they-have-a-6-figure-income/msg828994/#msg828994), but most people appear to believe the rewards outweigh those risks. Anecdotally, most celebrated stories of people reaching financial independence early in life involve married couples.
In fairy tales, everybody falls in love and marries, but that's not how real life works. In real life, some people will never fall in love, will never have a romantic relationship, and will never marry. That is the cold hard truth of real life. Those people already have to work longer to reach financial freedom, and without the benefit of a lifelong friend, so why exacerbate the situation by also burdening them with higher taxes?
Under the Canadian tax system, individuals are taxed separately and married couples cannot combine their income for tax purposes, with certain exceptions that will not be discussed here. In maizeman's other thread (http://forum.mrmoneymustache.com/taxes/visualizing-how-much-being-married-saves-(or-costs)-you-in-federal-income-tax/msg902050/#msg902050), he proposes bringing the same system to the United States. That is certainly an egalitarian idea. One problem with it, however, is that the US tax code does not contain a property law code. Instead, property law is governed by state law (http://forum.mrmoneymustache.com/taxes/selling-lake-property-and-boat/msg899715/#msg899715). In certain states, including California (the most populous state), employment income earned by the members of a married couple is generally considered to have been equally earned by the two partners, regardless of the actual division of who did the work. See, e.g., Hunt v. Commissioner, 22 TC 228 (https://scholar.google.com/scholar_case?case=8281291214712297186), 230 (1954) ("A husband's earnings from his personal efforts during the marriage are community property under the law of California. ... For purposes of Federal income taxation, each spouse is equally liable for payment of the tax on his or her respective equal share of the community income.") (citation omitted and emphasis added). (Although the quoted language refers to a "husband", the gender of the spouse is not material to the proposition of law.) In other words, maizeman's changes would still mean that married couples would benefit from income splitting so long as they lived in certain states, including the most populous state.
In order to implement maizeman's proposed changes uniformly across the United States, one would first need to analyse the constitutional question of whether it is within the authority of Congress to override state property law for the purpose of the tax code and, in effect, "reallocate" income based on who actually earned it. That is fairly subtle question for a variety of reasons and I do not propose to analyse it in this post.
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It's easy not to have a problem with (c) when it doesn't harm you.
Item (c) is especially unfair as applied to single people: a single person earning certain levels of income pays significantly more tax than a person who is otherwise identical but who is married to a person who does not earn income. In effect, single people are paying higher taxes in order to subsidise married couples of equivalent income level. Under the current regime, this effect phases out at a certain threshold, but dragoncar's proposed changes would prevent it from phasing out and would be even more unfair to single people.
Item (c) does not apply to single people at all. It relates to the difference between two different married scenarios.
You seem to be objecting to item (b), possibly in combination with something else
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None of the items in maizeman's list explicitly involve a comparison to single people. I think what I wrote about could fairly be considered to be within the ambit of (c), although it could also be considered to be within the ambit of (b) or even (a). The violation of (a) is that the current system is not progressive: a single person with a lower income can pay more tax, both in absolute dollars and in percentage of income, than a married person with higher income.
Incidentally, although maizeman claims the current system satisfies two of his three criteria, a closer inspection reveals that the current system actually satisfies none of them. It is not progressive (so it fails (a)), it does not consider only the combined income of a married couple (see, e.g., Rev Rul 1971-116 (http://www.charitableplanning.com/document/667157)) (so it fails (b)), and the question of how good marriage is depends on where income is concentrated in the partnership (so it fails (c)). In conclusion, maizeman's criteria may not be very useful for analysis as the current system fails all of them.
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It's easy not to have a problem with (c) when it doesn't harm you.
Item (c) is especially unfair as applied to single people: a single person earning certain levels of income pays significantly more tax than a person who is otherwise identical but who is married to a person who does not earn income. In effect, single people are paying higher taxes in order to subsidise married couples of equivalent income level. Under the current regime, this effect phases out at a certain threshold, but dragoncar's proposed changes would prevent it from phasing out and would be even more unfair to single people.
It's difficult to justify forcing single people to subsidise married people when you consider that being married already offers its own rewards: aside from having a constant friend and partner to share your life with, there are also numerous financial benefits (such as being able to earn twice the income without increasing expenses, thus dramatically reducing the length of the working career required to achieve financial independence). To be fair, there are also certain risks (http://forum.mrmoneymustache.com/welcome-to-the-forum/can-everyone-retire-in-6-years-if-they-have-a-6-figure-income/msg828994/#msg828994), but most people appear to believe the rewards outweigh those risks. Anecdotally, most celebrated stories of people reaching financial independence early in life involve married couples.
In fairy tales, everybody falls in love and marries, but that's not how real life works. In real life, some people will never fall in love, will never have a romantic relationship, and will never marry. That is the cold hard truth of real life. Those people already have to work longer to reach financial freedom, and without the benefit of a lifelong friend, so why exacerbate the situation by also burdening them with higher taxes?
Under the Canadian tax system, individuals are taxed separately and married couples cannot combine their income for tax purposes, with certain exceptions that will not be discussed here. In maizeman's other thread (http://forum.mrmoneymustache.com/taxes/visualizing-how-much-being-married-saves-(or-costs)-you-in-federal-income-tax/msg902050/#msg902050), he proposes bringing the same system to the United States. That is certainly an egalitarian idea. One problem with it, however, is that the US tax code does not contain a property law code. Instead, property law is governed by state law (http://forum.mrmoneymustache.com/taxes/selling-lake-property-and-boat/msg899715/#msg899715). In certain states, including California (the most populous state), employment income earned by the members of a married couple is generally considered to have been equally earned by the two partners, regardless of the actual division of who did the work. See, e.g., Hunt v. Commissioner, 22 TC 228 (https://scholar.google.com/scholar_case?case=8281291214712297186), 230 (1954) ("A husband's earnings from his personal efforts during the marriage are community property under the law of California. ... For purposes of Federal income taxation, each spouse is equally liable for payment of the tax on his or her respective equal share of the community income.") (citation omitted and emphasis added). (Although the quoted language refers to a "husband", the gender of the spouse is not material to the proposition of law.) In other words, maizeman's changes would still mean that married couples would benefit from income splitting so long as they lived in certain states, including the most populous state.
In order to implement maizeman's proposed changes uniformly across the United States, one would first need to analyse the constitutional question of whether it is within the authority of Congress to override state property law for the purpose of the tax code and, in effect, "reallocate" income based on who actually earned it. That is fairly subtle question for a variety of reasons and I do not propose to analyse it in this post.
Thank you for a fascinating read, Cathy.
I've done some further reading on community property laws now that I know such things exist and the fact that we somehow ended up with a system in the US where state laws are defining what income federal tax law applies to does throw an awfully big wrench into my hypothetical new tax system. Right now there are nine states with mandatory community property laws for allocating spousal income and presumably if any such change to the federal tax code actually passed plenty more states would quickly adopt similar systems to give their married residents the lowest possible federal tax burden. I can come up with lots of hypothetical strategies to try to avoid the issue, but they're all full of plenty of handwaving* and would likely lead to extensive litigation to decide the issue of constitutionality one way or the other. Otherwise I'm reduced to imagining passing a constitutional amendment (probably followed by years of litigation anyway). Pretty much always the outcome when people used to dealing with computer code think they've found a cool hack (https://xkcd.com/1494/) in the legal system.
This is actually one of the things I really like about discussion on the MMM boards. We've got everything from "is it logically possible to design a tax code to do X?" to "is it legally possible to design a tax code to do X" to "why in the world would I want to do X? I like having a not-X tax code just fine."
*For example make the MFJ brackets = the single ones but have a complex tax credit based on the income of the lower earning spouse such that it'd replicate the tax curve of two people separately filing as single. <-- with a disclaimer that I'm not asking Cathy or anyone else to comment or speculate on the legality/constitutionality of such a measure, just pointing out that to my own completely untrained eye it sounds like the sort of messy thing that A) likely couldn't be passed into law and B) would almost certainly be tied up in the courts for years if it did pass.
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Financial Samurai has a good article on this:
http://www.financialsamurai.com/the-financial-benefits-and-tax-penalties-for-gay-marriage/
-Chops
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I will get lambasted for this but how about we solve all of this by implementing a flat tax of X% on all income (whatever it takes to balance the budget, maybe 20-25%?). Each wage earner gets a standard deduction equal to poverty level so no taxes on the first about $20k or so. No brackets that depend on your marital status. Just a certain amount of deduction per earner. Bam, done. No hard accounting, no deductions. Easy peasy. Higher earners still pay more percentage of gross, it's just a very smooth gradual curve, you only pay the same percentage of tax on everything over poverty level. It would look something like this:
Gross Income/Taxable Income/Tax Paid/Effective Tax Rate
$20000/$0/$0/$0
$30000/$10000/$2000/7%
$40000/$20000/$4000/10%
$60000/$40000/$8000/13%
$80000/$60000/$12000/15%
$100000/$80000/$16000/16%
$150000/$130000/$26000/17%
$200000/$180000/$36000/18%
Adjust the "standard deduction" and flat tax rate as you see fit, I just used those numbers for ease of calculation. If you REALLY feel the need, add in one top bracket so people can feel better about not giving the top 2% (or 5%, whatever) a tax break or something.
Of course this will never happen because it would make the government too transparent and the ability to influence votes based on a promise of tax incentives or breaks would go away. Not to mention it would do away with a whole sector of tax preparation professionals and most of the IRS.
I actually feel like this would be really fair to everyone.
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Incidentally, although maizeman claims the current system satisfies two of his three criteria, a closer inspection reveals that the current system actually satisfies none of them. It is not progressive (so it fails (a)), it does not consider only the combined income of a married couple (see, e.g., Rev Rul 1971-116 (http://www.charitableplanning.com/document/667157)) (so it fails (b)), and the question how good marriage is depends on where income is concentrated in the partnership (so it fails (c)). In conclusion, maizeman's criteria may not be very useful for analysis as the current system fails all of them.
Yikes! That'll teach me to be sloppy in defining my variables and constraints. I stand by the original position that it is impossible to design a tax code that satisfies A, B, & C as originally defined simultaneously but would be possible to design tax codes that satisfy any two or the three criteria. However, in order my statement about the current tax code to apply I have to impose additional constraints that you're correctly pointing out I didn't consider in my original post.
Additional constraints not previously verbalized in italics.
A) A progressive tax code where people who earn more pay a higher rate than people who earn less (considering only comparisons among households of the same classification ie comparisons among MFJ, MFS, HoH, or single people but not comparisons between the various populations)
B) A tax code that only considers the total income from both members of a married couple to calculate their tax liability
C) A tax code what doesn't make marriage a better deal for one person earning X dollars and one person earning $0 than for two each earning .5X dollars.
Right now (evaluating only the basic federal income tax code brackets, and excluding the effects of various credits and deductions, the separate treatment of dividends and long term capital gains, as well as other forms of taxes imposed by various levels of government, including but not limited to payroll taxes, state income taxes, sales taxes, property taxes etc) we have A & B which makes it impossible to achieve C.
It is definitely bad form to start revising ones arguments only after people start poking holes in them as originally stated, so let me apologize for doing so in this case.
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I will get lambasted for this but how about we solve all of this by implementing a flat tax of X% on all income ...
I actually feel like this would be really fair to everyone.
I'm not going to lambast you at all because you completed the set!
We've had dragoncar arguing for progressive taxation (A) and lumping income together (B), I've been arguing for progressive taxation (A) and making marriage an equally good deal for people with concentrated or divided incomes (C), and now we've got the final argument: lumping income together (B) (maybe? do you want to give a married couple 2x the deduction of a single person or would each person get one deduction to use or lose?) and making marriage an approximately equally good deal for people with concentrated or equally divided incomes (C) through the use of a flat tax. It demonstrates how differently people weight the three factors when trying to design a system that's "fair."
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It is definitely bad form to start revising ones arguments only after people start poking holes in them as originally stated, so let me apologize for doing so in this case.
That post may very well have been the most gracious acceptance of correction by resident-stickler-for-hypercorrectness Cathy in forum history, so I wouldn't worry about committing bad form if I were you :)
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I will get lambasted for this but how about we solve all of this by implementing a flat tax of X% on all income ...
I actually feel like this would be really fair to everyone.
I'm not going to lambast you at all because you completed the set!
We've had dragoncar arguing for progressive taxation (A) and lumping income together (B), I've been arguing for progressive taxation (A) and making marriage an equally good deal for people with concentrated or divided incomes (C), and now we've got the final argument: lumping income together (B) (maybe? do you want to give a married couple 2x the deduction of a single person or would each person get one deduction to use or lose?) and making marriage an approximately equally good deal for people with concentrated or equally divided incomes (C) through the use of a flat tax. It demonstrates how differently people weight the three factors when trying to design a system that's "fair."
I think, in my hypothetical tax code scenario, I would make it so that each person in a marriage would have the ability to each take a standard deduction, up to the amount they earned themselves. So if each spouse worked, they would get the first $20k tax free as long as they earned that much through their own labor. If they earn less, say, 10k, their standard deduction is capped at that, just as if they were single. No work/income? No deduction, just like a single person.
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I will get lambasted for this but how about we solve all of this by implementing a flat tax of X% on all income ...
I actually feel like this would be really fair to everyone.
I'm not going to lambast you at all because you completed the set!
We've had dragoncar arguing for progressive taxation (A) and lumping income together (B), I've been arguing for progressive taxation (A) and making marriage an equally good deal for people with concentrated or divided incomes (C), and now we've got the final argument: lumping income together (B) (maybe? do you want to give a married couple 2x the deduction of a single person or would each person get one deduction to use or lose?) and making marriage an approximately equally good deal for people with concentrated or equally divided incomes (C) through the use of a flat tax. It demonstrates how differently people weight the three factors when trying to design a system that's "fair."
I'm certainly not "arguing for" (b). I don't see a problem with eliminating joint filing altogether. I just don't want my tax rate to go up because I got married (happened).