It’s About to Become Cheaper To Be Single – Again

There have been several provisions available to taxpayers since 2003 that have provided relief from the old “marriage penalty” that was inherent in the tax code.  The term marriage penalty refers to several provisions in the tax law that made it automatically more expensive (from a tax payout perspective) for two people to be married filing jointly than to be two single persons filing singly.  The following marriage penalty relief provisions will be expiring at the end of calendar year 2010:

• Standard deduction for Married Filing Jointly (MFJ) is exactly double the standard deduction for single people.  Under the expiration of the EGTRRA provisions, the “marriage penalty” would be back in effect, and for 2011 the MFJ standard deduction would only allow for 167% of the single standard deduction.
• The 15% tax bracket for MFJ is presently double the income level of the single bracket.  When the marriage penalty kicks back in, this bracket will only be 167% of the single bracket.
• Earned income credit (EIC) phase-out range for married folks is presently $3,000 more than the phase-out range for singles; under the old (soon to be new) rules, there was only a $1,000 difference in the phase-out ranges.
• Education Savings Account (Coverdell ESA) phase-out range for married people is presently 200% of the phase-outs for single people.  When the provision expires, this will revert to the old phase-out range, which is 167% of the single range.

These changes may not seem like a lot, but for folks who need the tax relief the most these changes will hit very hard.  This will be a significant tax increase on the folks with 2009 household taxable incomes above roughly $56,000.  Everyone who files Married Filing Jointly will have additional tax on their income, since the progressive nature of the tax brackets ensures that if your income is above that bracket that you get to take part in the increase as well.

The Impact Illustrated

Since we don’t have all of the bracket information for 2011 at hand yet, I’ll illustrate this with the 2009 figures, reducing the standard deduction and 15% brackets to the comparable levels that they’ll revert to in 2011.  For a family with a $85,000 gross income, using the standard deduction of $9,520 (instead of $11,400), and four total exemptions (4 x $3,650 = $14,600), winds up with a taxable income of $60,879.  Under the revised brackets, this would result in a tax of $8,712.  Under the present system, the taxable income would be $59,000, and using the present tables the resulting tax would be $8,015 – nearly 10% less!

The effective rate on the household’s gross income of $85,000 will go from 9.2% to 10.2%.  For the same family in our example but with a household gross income of $120,000, under the new schedule and bracket the tax would be $17,462, versus $15,875 using the real 2009 schedules, changing the effective rate for the family from 13.2% to 14.6%.  The effect becomes less pronounced as incomes rise, due to the fact that the marriage penalty is in full effect for the higher brackets.  And this doesn’t take into account the revision to the tax brackets that will go into effect as of 2011 as well – read more on that change by clicking here.

And there is no benefit whatsoever to filing as Married Filing Separately.  This method rarely benefits the overall tax picture, and it usually winds up incurring additional tax in the end result.

Just a little more cheery stuff to look forward to… of course I don’t think this should impact your choices with regard to your marital status.  Just know for a fact that your taxes will be on the rise, no matter what your income is, starting in 2011 (if not before!).

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author