Are two incomes better than one for tax purposes?

Young couple in their kitchen contemplating the marriage tax benefits they might get for their federal income tax. Young couple in their kitchen contemplating the marriage tax benefits they might get for their federal income tax. Image:

In a Nutshell

On your wedding day, taxes were probably the last thing on your mind. But now that the honeymoon is over (literally if not figuratively), it’s important to understand the tax implications of having two incomes in the household. The marriage tax benefit is only part of it.

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Getting married means making lots of decisions, like whether to have kids or if both partners will work after tying the knot.

In fact, in most American marriages, both partners are employed, according to the Bureau of Labor Statistics. While more income may seem like an obvious advantage of getting married, it’s important to also understand the tax implications of having two incomes in a household.

Let’s look at some common changes that occur when you get married and how they may impact your taxes, including the marriage tax benefit and the pros of having two incomes.


Filing status

When you’re married, you generally have two options for filing: married filing jointly or married filing separately. Your filing status plays a big role in determining your tax liability, filing requirements, and eligibility for various tax deductions and credits.

For federal tax purposes, if you are married on the last day of the tax year, you’re considered married for the entire year. So even if you get married on Dec. 31, 2018, you’re considered married for the 2018 tax year.

If you each had your own incomes before getting married, and will both continue working after marriage, the filing status you choose will significantly affect how your incomes are taxed. The tax rate and bracket you had as a single filer will likely be different if you’re married filing jointly.

When you file jointly, you and your spouse combine your income and allowable expenses and report them on a single form. If you choose a status of married filing separately and live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin or Alaska, if you opt-in), you can use Form 8958 to allocate income and deductions between you and your spouse.

If you choose to file separately and don’t live in a community property state, you’ll simply report the income you earned and deduct the expenses you actually paid. If you pay expenses from a joint fund, you presumably each paid one-half of the expense unless you can show otherwise.

How do I choose a filing status?

Things to know about filing separately as a married couple

“Typically, there is little advantage to filing separately,” says Adam T. Cary, a CPA in Peoria, Arizona. “However, if one of the spouses has an income low enough, it may make sense to file separately to have a lower monthly payment on their student loans” on an income-driven repayment plan.

Also, when you file a joint return, both spouses can be held jointly responsible for all the taxes, interest and penalties due on the joint return, even if most of the income was earned by only one spouse. This may be an issue when one spouse has a small income and usually receives a big tax refund, but the other spouse has significant earnings and too little tax withheld. The big refund anticipated by the low-earning spouse goes toward paying the joint tax bill.

But keep in mind that some special rules come with the married-filing-separately status, including but not limited to the following:

  1. Your tax rate may be higher than on a joint return.
  2. You may lose tax benefits for paying childcare or dependent care expenses.
  3. You can’t take the earned income tax credit.
  4. You may lose the tax benefits of adoption.
  5. You lose tax benefits for higher education, including the American opportunity tax credit, the lifetime learning credit, the deduction for student loan interest, and the ability to exclude interest income from U.S. savings bonds used for higher-education expenses.
  6. Your deduction for capital losses is limited to $1,500 on each return (instead of $3,000 on a joint return).

In addition, if you file separately and your spouse itemizes deductions, you are required to itemize as well, even if the standard deduction would result in a lower tax bill.

Considering the potential impact of married filing jointly versus married filing single, it’s a good idea to compare what your tax liability would be using each filing status. Most tax-preparation software can help you with this comparison.

Marriage penalty

Sometimes, a couple pays more tax as a married couple than they would pay if they were unmarried. This is known as a “marriage penalty.”

Marriage penalties can occur when the married-filing-jointly income tax brackets and the standard deduction are not double those of the single-filer income tax brackets and standard deduction.

Consider the 2018 tax brackets.

Rate For Unmarried Individuals, Taxable Income Over … For Married Individuals Filing Jointly, Taxable Income Over …
10% $0 $0
12% $9,525 $19,050
22% $38,700 $77,400
24% $82,500 $165,000
32% $157,500 $315,000
35% $200,000 $400,000
37% $500,000 $600,000

 

As you can see from the table above, for all but the highest tax bracket, the taxable income limit for married couples is double that of unmarried people. For people in the 37% tax bracket, there is a significant marriage penalty.

In 2018, the standard deduction for a single taxpayer is $12,000. The standard deduction for married filing jointly is $24,000. So currently there is no marriage penalty when it comes to the standard deduction, although there was in years past.

There are other marriage penalties in the tax code as well. Let’s take a look at a few of them.

Itemized deduction for medical expenses

For 2018, taxpayers can claim an itemized deduction for medical expenses, but only to the extent that their unreimbursed medical expenses exceed 7.5% of their adjusted gross income.

A single taxpayer earning $75,000 per year would need to have unreimbursed medical expenses greater than $5,625 (7.5% of $75,000) in order to itemize medical expenses. What’s more, itemizing deductions might not offer the most tax benefit for them if the total of their itemized deductions — including mortgage interest, state and local income and property taxes, and charitable donations — was less than the standard deduction of $12,000 for single filers.

But if that taxpayer married a spouse who earned $50,000 per year, their joint income would be $125,000. That means that they couldn’t deduct medical expenses unless their expenses were greater than $9,375 (7.5% of $125,000). In addition, their total itemized deductions would have to be greater than the standard deduction for a married couple ($24,000 for 2018) in order to offer them a greater tax benefit.

Earned income tax credit

The earned income tax credit is a tax credit aimed at benefiting working people with low-to-moderate income. Married couples may actually be penalized when it comes to claiming the EITC, because the maximum earnings at which married couples can qualify for the credit are not double those of single filers.

To claim the EITC for 2018, filers must have earned income and adjusted gross income that are each less than the following limits.

Filing Status Qualifying Children Claimed
Zero One Two Three or more
Single $15,270 $40,320 $45,802 $49,194
Married Filing Jointly $20,950 $46,010 $51,492 $54,884

Mortgage interest deduction

For 2018, taxpayers who file as married filing jointly can claim an itemized deduction for interest paid on up to $750,000 of home mortgage debt acquired after Dec. 31, 2017. Prior to the Tax Cuts and Jobs Act, that limit was $1,000,000 for debt used to buy, build or substantially improve the home plus up to $100,000 of home equity debt. Mortgages initiated before Dec. 15, 2017, are grandfathered in using this higher limit.

In 2016, in response to a Ninth Circuit decision, “Voss v. Commissioner,” the IRS confirmed that the limit applies on a per-taxpayer basis rather than on a per-residence basis. For 2018 taxes, this means that of an unmarried couple who buys a home together, each spouse is entitled to a full deduction. But a married couple with a mortgage of $1.5 million (initiated after Dec. 15, 2017) is limited to deducting interest on $750,000 of that debt in 2018.

Marriage tax benefit

In some cases, a couple receives a marriage bonus because they’ll pay less tax filing jointly than they would if they were single. Here are some aspects of the tax code that may result in a marriage bonus.

Spousal IRA

Typically, you need to have earned income to contribute to an IRA. But when a couple is married, both spouses can contribute to IRAs, even if one person doesn’t work. The working spouse can contribute up to $5,500 per year ($6,500 if age 50 or older) to their own IRA and to a spousal IRA for their nonworking spouse, depending on the employed spouse’s income. That means that, if the working spouse’s income is sufficient, the couple can contribute a total of $11,000 to IRAs (or up to $13,000 if both spouses are 50 or older). For more information on income limitations and rules surrounding spousal contributions to traditional IRAs, visit IRS Publication 590 and read about the Kay Bailey Hutchinson Spousal IRA Limit.

Learn more about deducting charitable contributions

Charitable contributions

When you donate to charity, your itemized deduction for those charitable contributions are typically limited to 50% of your adjusted gross income. Generally, excess contributions can be carried forward and deducted in up to five subsequent tax years.

Having two incomes means a higher adjusted gross income when you file a joint return. And that means a higher limit on charitable donations. So one spouse may make very large charitable contributions and receive a full deduction, even if he or she doesn’t have an adjusted gross income of at least double that amount.

For example, individually, Jill has an adjusted gross income of $100,000, while Jack’s is $75,000. When Jack was single, the maximum he could deduct for charitable contributions would have been (a very generous) $37,500 ($75,000 divided by two). However, by marrying Jill and filing jointly, Jack’s new adjusted gross income is $175,000, which allows the couple to take a deduction on up to $87,500 ($175,000 divided by two) of charitable contributions. That means Jack could, in theory, contribute his entire salary to charity and take a full deduction.


Bottom line

The U.S. income tax code is complex, and there are many ways for married couples with two incomes to be penalized or receive marriage tax benefits based on their marital status. If you’re wondering whether a marriage penalty or bonus applies to you, the Tax Policy Center has a Marriage Bonus and Penalty Tax Calculator to help you compare the taxes you would pay filing a joint return versus what you would pay if you filed separately.

Whether you’re already married or just thinking about tying the knot, it’s important to understand how marriage and having two incomes will affect your taxes.