audtatious wrote:Seems with the upcoming tax laws you will be penalized more if filing married. Guess it depends on the circumstances.
Always has. There's a story behind it that I was told in Federal Income Tax Law Class.
So, for a while, rich people looked for ways to minimize their taxes, and one way to try to do it was to spread out your income between you and your spouse. Two people making $50,000 will pay less in taxes than one person making $100,000, after all. But the IRS and the Courts agreed that this wasn't kosher - your income was your income, after all.
But some States, like Washington and Pennsylvania (but not originally California) were "community property" states, which said that the income of one spouse was to be income of the household. That meant that they effectively did get the 50/50 split. The Courts told the IRS that, because this was the State of Washington's choice, and not the taxpayer's, the taxpayer couldn't be held accountable for it, and that the 50/50 split was fine. Some states, like Oklahoma, tried to institute an optional "community property" law, where you could choose your income calculation method. But the Courts sided with the IRS because the elective nature of the OK law smacked of tax avoidance.
So, Truman, after being elected in 1948, went on to institute joint returns for federal income tax, because community property was super popular politics (especially among the wealthy), and it says that a married couple pays twice as much tax as a single person with half the cash income.
So, let me chart this out for you. Pre-Truman:
Single person with $10,000 income = $1,000 tax.
Single person with $20,000 income = $3,000 tax.
Married person (with a deadbeat spouse) with $20,000 income = $3,000 tax.
Post-Truman:
Single person with $10,000 income = $1,000 tax.
Single person with $20,000 income = $3,000 tax.
Married person (with deadbeat spouse) with $20,000 income = $2,000 tax.
So you can see that there was (until 1969) a major incentive to be married. If I make $150,000 and my wife makes $25,000 income, we would have paid taxes, as a couple, equal to what two people making $87,500 would have paid. If this keeps any of the cash from going up into a tax bracket where it would have been before, we've come out on top.
But, as you might have guessed, this changed a bit, and some of you might be familiar with married couples who don't get that benefit (they probably make about the same amount of cash). If there's an incentive for getting married, then it follows that there's somewhat of a penalty for failing to do so, right? Well, Vivian Kellers understood this, and being that after WWII there was a bit of a shortage of eligible men to marry, this penalty became something women couldn't really account for. So she went after the government, and got the individual rates down. But Congress didn't alter the married couple rates in the same way, so now, in some cases it's not in a couple's best interest to be married.
Let me illustrate. According to today's tables:
- A couple with $100,000 of taxable income, by whatever combination, pays $23,528.00 in federal income taxes.
- A married couple, each making $50,000 but filing separately, pays a combined $23,528.00 in federal income taxes, the same as filing jointly.
- Two single individuals, each making $50,000, would pay a combined $22,254.00 in federal income taxes, or $1,274 less than they would have paid as a married couple.
So obviously, being married when two people make roughly the same amount of money is not a benefit, as far as taxes are concerned. But if we're talking about two very different incomes, say $80,000 and $20,000, it's a very different story.
- A couple with $100,000 of taxable income will still pay $23,528.00 in federal income taxes.
- If they were not married, that couple would send to the government a combined $24,449, or $921 more.
- If they were married but filing separately, they would pay a combined $26,165.75, or $2,637.75 more than if they were filing jointly.
In short: unless you've got a lot of individually deductible items and you plan to itemize (like if you've got a s***-ton of uncompensated medical expenses), it's not worth it to ever file separately. Most people who do don't even do it for that reason: it's because they're getting a divorce and they don't want their soon-to-be-ex-spouse to know how much cash they bring home.
Anyways, I'm not sure what the new bill would do, but I do know how it stands today - some people
are penalized for getting married. By the way, this was awesome review for my tax final on Wednesday. Any more questions? Fringe Benefits? Prizes? Capital Gains?