Author Topic: Marriage Penalty and optimizing taxes  (Read 4094 times)

Jags4186

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Marriage Penalty and optimizing taxes
« on: November 04, 2014, 10:54:42 AM »
So I've been looking at some of these marriage penalty calculators (particularly this one https://www.yourmoneypage.com/family/marriagep.php) and I noticed something odd here.

I put in my salary and my SO salary (80k and 40k).

If I assume no capital gains or any other income, and no children, I get some interesting results.

80k with 17500 401k deduction, 40k with 3200 deduction (minimum for her full match), we would get a marriage benefit of $55.

If we switched it to both of us maxing out our 401ks there is a marriage penalty of $2090!!

Maybe I haven't fully thought this through, but is it beneficial not to max out both 401ks if we were to tie the knot?  Or am I missing something?

Cromacster

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Re: Marriage Penalty and optimizing taxes
« Reply #1 on: November 04, 2014, 11:00:38 AM »
If this were a math test you just lost points for not showing your work!

Jokes aside, it would help if you posted the numbers, assumptions, deductions, tax rates, etc. to show how you arrived at your conclusion.  You are asking us to verify relatively blindly and you are much less likely to receive any help.

Sylly

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Re: Marriage Penalty and optimizing taxes
« Reply #2 on: November 04, 2014, 11:03:01 AM »
That result doesn't look right at all.
I put in your numbers, and saw that the 'married' tax didn't change when I added the 3200, or 17500 to the second person, while the 'singles' tax does. So the 'married' tax is not calculating the deduction correctly.

Just looking at the tax brackets, even without deductions I don't think you'd be in the penalty region. Let alone after deductions.
edit: Just realized the above statement was made under the assumption both individuals have the same marginal tax rate. But with larger deductions, the 40k earner may have lower rate. So my statement may not be entirely true. But I'm too lazy to do the math right now.
« Last Edit: November 04, 2014, 11:07:11 AM by Sylly »

Jags4186

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Re: Marriage Penalty and optimizing taxes
« Reply #3 on: November 04, 2014, 11:08:00 AM »
If this were a math test you just lost points for not showing your work!

Jokes aside, it would help if you posted the numbers, assumptions, deductions, tax rates, etc. to show how you arrived at your conclusion.  You are asking us to verify relatively blindly and you are much less likely to receive any help.

Cromacster,

Sorry there is not much work involved...I was using on of those online calculators (the one I linked to).

Here is the full breakdown:

Earned Income:

Person 1: 80000  Person 2: 40000

Longer Term Capital Gains

P1: 0 P2: 0

Pretax IRA Deductions: 

P1 17500  P2 3200

Dependent children:

0

Child Tax Credit

0

Results:
Individuals would pay $17,115.00 in taxes total
Married couple would pay $17,060 in total
Married bonus: $55

Earned Income:

Person 1: 80000  Person 2: 40000

Longer Term Capital Gains

P1: 0 P2: 0

Pretax IRA Deductions: 

P1 17500  P2 17500

Dependent children:

0

Child Tax Credit

0

Results:
Individuals would pay $14,970.00 in taxes total
Married couple would pay $17,060 in total
Married Penalty: $2090.00


So according to this calculator you would pay the same income taxes regardless of whether or not you max 2 401k or not.  If thats the case, why would you tie up money in a 401k?  Wouldn't it be better to keep it in a taxable account?


Jags4186

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Re: Marriage Penalty and optimizing taxes
« Reply #4 on: November 04, 2014, 11:10:01 AM »
That result doesn't look right at all.
I put in your numbers, and saw that the 'married' tax didn't change when I added the 3200, or 17500 to the second person, while the 'singles' tax does. So the 'married' tax is not calculating the deduction correctly.

Just looking at the tax brackets, even without deductions I don't think you'd be in the penalty region. Let alone after deductions.
edit: Just realized the above statement was made under the assumption both individuals have the same marginal tax rate. But with larger deductions, the 40k earner may have lower rate. So my statement may not be entirely true. But I'm too lazy to do the math right now.

You could very well be right--there may be an error.

pzxc

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Re: Marriage Penalty and optimizing taxes
« Reply #5 on: November 04, 2014, 11:28:03 AM »
As I understand it, there is a "sweet spot" in combined income where being married helps you in taxes.  If you make too much, or too little, income then it actually hurts you to be married.  Maybe after accounting for the reduced AGI after 401k deductions, you're too low to be in the sweet spot?

Sid Hoffman

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Re: Marriage Penalty and optimizing taxes
« Reply #6 on: November 04, 2014, 01:02:36 PM »
Earned Income:

Person 1: 80000  Person 2: 40000
Longer Term Capital Gains
P1: 0 P2: 0
Pretax IRA Deductions: 
P1 17500  P2 17500
Dependent children:
0
Child Tax Credit
0
Results:
Individuals would pay $14,970.00 in taxes total
Married couple would pay $17,060 in total
Married Penalty: $2090.00

There is NO WAY that is right.  I grossed about $120k last year and we only paid something like $9000 in federal income tax, not $15,000.

Doing the math by hand:
$120,000 - ($17,500 * 2) = $85000
Standard deduction: $12,400, personal exemption ($3950 * 2) = $20,300
MAGI: $64,700

10% Bracket: 0-18,150 = $1850
15% Bracket: 18151-73,800 = $6982.5

Total tax owed: $8832.5

That math very closely matches my last tax return, so I'm pretty confident that "marriage penalty" website is a hoax or FUD for political purposes.

teen persuasion

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Re: Marriage Penalty and optimizing taxes
« Reply #7 on: November 04, 2014, 01:07:46 PM »
I was just going to say that the math on that calculator is way off.  Looking at the charts in last year's 1040 booklet, the tax at just under $100k MFJ isn't even $17k.  That would be your taxable income with no retirement contributions at all, just your standard deduction and personal exemptions.

Sid Hoffman

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Re: Marriage Penalty and optimizing taxes
« Reply #8 on: November 04, 2014, 01:22:34 PM »
FWIW, the "marriage penalty" doesn't kick in for savers until you are quite high income.  For the 10 & 15 percent brackets, the income range is exactly twice as high for married couples.  In the 25% bracket, you don't max out the bracket until $148,850 as a married couple as opposed to $89,350 for individuals, but keep in mind that it's extremely rare to have identical income earners.  Usually it is a 2:1 or at least 3:2 ratio, so filing jointly is still helpful.

At any rate, let's answer the question: "Where does the marriage penalty truly kick in for people who save a lot?"

To answer that, I'd start at the top of the 25% bracket of $148,850 and then add in everything that would normally not count as income.  Standard deduction and personal exemptions add up to $20,300.  401k for 2014 was $17,500 so that's another $35,000.  Suppose you have $5000 of employer covered healthcare benefits.  That's a whopping $60,300 of income that is shielded from federal taxation, which means you can gross about $209,150 as a married couple and still slide in at the top of the 25% bracket.

IMHO, somewhere in the neighborhood of $210k/year of ordinary income is a crapload of money, and I'm not even counting child tax credits, EV car tax deductions, or any of many other thousands of dollars of deductions or credits a high wealth family typically is eligible for.  To cry about a marriage penalty when you're making over $210k/year falls under the category of being a baby about it.  You're at 4X the median household income for Americans at that point.  Nothing to get complainypants about.

beltim

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Re: Marriage Penalty and optimizing taxes
« Reply #9 on: November 04, 2014, 01:51:09 PM »
FWIW, the "marriage penalty" doesn't kick in for savers until you are quite high income.

I don't disagree with the rest of your post, but there's a marriage penalty for low income as well.  I think it comes from a reduction in the earned income tax credit.

http://taxfoundation.org/article/effects-marriage-tax-burden-vary-greatly-income-level-equality

Sid Hoffman

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Re: Marriage Penalty and optimizing taxes
« Reply #10 on: November 04, 2014, 02:09:04 PM »
Well true, although it becomes muddy at that point.  When you're low income, housing is your #1 expense and the theory is that single people live on their own and pay their full housing cost, while married people live together and split the housing cost.  I know, theory and reality are never the same thing, but it's "supposed" to be less of a problem at the low income range where there's less money at stake and people's bills vary wildly.  I mean some married couples even still live with their parents.  Both my own sister and one of my sister in law's lived with their parents for several years while married.  Circumstances are all over the place for the working poor, whereas it seems much more homogeneous at high income levels.