Nick Forgione
While every new marriage looks different, many newly-married couples have one thing in common: their tax planning needs change. High-income couples filing taxes jointly for the first time may be dismayed by how much they lose to the marriage tax penalty, for one thing. Working with a tax advisor is imperative, especially when you’re engaged or newly married. Both you and your spouse should be clear about how your union will affect your tax picture. Don’t let IRS surprises ruin the honeymoon period.
WHAT IS THE MARRIAGE TAX PENALTY?
A marriage tax penalty occurs when two people who earn roughly equal incomes pay higher income taxes when filing jointly as a married couple than they would pay if they filed as single individuals. The marriage penalty on federal income tax went away for many couples with the enactment of the Tax Cuts and Jobs Act, which adjusted the middle tax brackets to make the brackets for married filers exactly twice as wide as the brackets for single filers. Under this change, married couples in which each individual had a similar income under $200,000 would pay the same tax rate when filing jointly as if they filed individually.
However, high-income couples are still subject to the marriage tax penalty because the TCJA didn’t double the top tax brackets. For tax year 2023, an unmarried filer pays the top tax rate (37 percent) if their income exceeds $578,125. A married couple filing jointly falls into the top bracket if their combined income is above $693,750. Imagine a married couple in which each person earns approximately $350,000. This year they’ll pay 37 percent tax on their joint income, compared to 35 percent tax they would pay if they remained unmarried and filed individually.
Note that many states also impose their own marriage tax penalties on state taxes by using disproportionately narrow tax brackets for married couples, but Massachusetts is not one of them.
CAN THE MARRIAGE TAX PENALTY BE AVOIDED?
As long as you're still married, filing taxes separately isn’t a solution to the marriage tax penalty. The penalty is also built into the tax rates for married individuals filing separately. For 2023, if you both have income exceeding $346,875, you’ll both still pay 37 percent tax—the same as you would if you combined your incomes and filed jointly. Filing separately would also cause you to lose out on some of the credits and deductions that benefit married filers.
Under current law, the marriage tax penalty is unavoidable for the highest-income taxpayers. Strategizing with your tax advisors to mitigate its impact is the best course of action.
WHAT ABOUT OTHER KINDS OF TAX PENALTIES FOR HIGH-INCOME COUPLES?
In addition to being kicked into the top tax bracket, there are a few other ways that marriage can trigger tax penalties for high-income filers. For example, investors may owe a 3.8 percent tax on net investment income. An individual taxpayer owes it if their modified adjusted gross income exceeds $200,000, but a married couple only has to have a MAGI of $250,000 to trigger the investment tax.
High-income married taxpayers are also penalized when calculating alternative minimum tax. The AMT exemption for married filers is less than twice the exemption amount allowed for single filers. Again, married taxpayers don’t have any real recourse for these penalties other than using careful tax planning to offset them as much as possible.
WHAT WILL HAPPEN TO THE MARRIAGE TAX PENALTY IF THE TCJA SUNSETS?
We know that tax brackets are expected to return to their pre-TCJA percentages at the beginning of 2026, raising the top tax bracket from 37 percent back up to 39.6 percent. What’s less clear is how tax rates will be set for each filing status. If the lower tax brackets are narrowed for married filers post-TCJA, the federal marriage tax penalty would affect married couples across a broader income range. It’s just one of many post-TCJA changes we’re going to have to wait to see unfold.
ARE YOU GOING TO OWE A MARRIAGE TAX PENALTY?
Tax planning is part of a holistic approach to wealth management, and should be revisited with each major life event. Our advisors work closely with our high-income clients to strategize for tax challenges like the federal marriage tax penalty. We’re happy to explain anything that seems unclear or talk you through your options until you and your spouse feel confident about your tax strategy. Whether you’re just starting to think about marriage, or you’re already married and struggling with tax planning, we encourage you to reach out with any questions. Contact us today.
Nick is a Certified Public Accountant and holds a Master’s Degree in Accounting from the University of Massachusetts Amherst. Nick has worked in the accounting space for 5+ years in varying industries ranging from audit, to corporate accounting and individual taxation. Since joining Sachetta in 2022 as an accountant, Nick has worked on projects on both the individual taxation and wealth management side of our company. Nick grew up in Lynnfield, MA where he currently resides with his wife, Sarah and dog, Willow. In his spare time Nick enjoys traveling, exploring new restaurants, and spending time outdoors hiking and fishing.