Getting married is likely one of the biggest life decisions you will make, and while it may seem like an easy one, it could just have gotten a little more complicated. In addition to the obvious selection and reflection of a life with a future spouse, and all the family, friends and other things that come with it, there may now be a new consideration to add to the mix: Uncle Sam. That’s because the so-called “marriage penalty” may have just gotten larger for high-earning dual-income households.
Under the recently released so-called “Green Book,” which contains the Department of Treasury’s tax-related proposal for the Biden administration, is a proposal to increase the top marginal income tax rate from the current 37% to 39.6%. This is similar to previous tax increase proposals by President Biden. Specifically, the Green Book provides that the increase, as applied to taxable year 2022, will impact those with taxable income over $509,300 for married individuals filing jointly and $452,700 for unmarried individuals. However, because of the way our tax system and tax brackets work, some married couples who each earn under $452,700 would be subject to a higher tax, as compared to their single counterparts earning the same amount. In this instance, being unmarried and single is better — for tax purposes anyway.
Married vs. Single: Do the Tax Math
The reason for this dichotomy is because we have different tax brackets for single filers and married filers. Assume you have a couple (not married) each making $452,699. These taxpayers would not have reached the highest bracket for an unmarried individual per the Green Book proposal. Each individual would be taxed at the 35% bracket, resulting in approximately $132,989 in federal income taxes using this year’s tax bracket for single filers (or a total of $265,978 combined for both individuals).
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If instead this couple decides to marry, they will now have a combined income of $905,398, putting them in the highest tax bracket (39.6%) as married filing jointly. This translates to an estimated $284,412 in federal income tax, which is $18,434 more in taxes (or about 6.9%) than compared to a situation if they were single, according to a projected tax rate schedule we created based on the available federal income tax information.
There is another option for married couples: the filing status of “Married Filing Separately.” In this situation, the couple may file as “single” for tax purposes but must use the “Married Filing Separately” rate table, which for the vast majority of situations, when you do the math, does not yield a better result.
The Effect, Going Forward
If the changes, as currently proposed, pass, I am anticipating a lot of tax planning around filing status and income threshold management. Accountants will be very busy with detailed analyses and projections to evaluate the optimal filing status for married couples, and where certain deductions or planning opportunities would be more beneficial if applied to one spouse over the other.
In extreme cases, could this factor into one’s marital decision? While I certainly hope that we do not make life decisions around taxes, the reality is that taxes hit the bottom line, and that impact is real.
No one has a crystal ball as to what will happen, but let’s hope that in the end, this doesn’t become an unforeseen factor in the increasing divorce rate we have already seen since the start of the pandemic. Let’s hope for marital bliss, not marital dismiss.
As part of the Wilmington Trust and M&T Emerald Advisory Services® team, Alvina is responsible for wealth planning, strategic advice, and thought leadership development for Wilmington Trust’s Wealth Management division.
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