DOMA Struck Down; the Nation Revisits the Tax Code for Married Couples
July 3, 2013Print
Last week’s Supreme Court ruling to strike down the Defense of Marriage Act affirmed that same-sex marriages deserve equal treatment under federal law. One outcome is that, just like spouses of the opposite sex, these couples will now be able to file their federal income taxes jointly. (The administration has yet to take a position on whether this is true for same-sex couples who were married in a state that recognizes same–sex marriage but now reside in a state that does not. Current tax law relies on state of residence, not state of celebration of marriage, to determine whether couples can file jointly, a position that is now under review.)
Aside from the symbolic significance of being recognized at last as married couples, these households will also face financial adjustments. The federal income tax code is extremely complex. A married couple that files jointly pays taxes on the couple’s total taxable income, which can raise or lower the couple’s combined tax liability or tax refund. This implication catapulted the issue of the “marriage penalties” associated with certain federal income tax provisions, including the Earned Income Tax Credit, into the media spotlight.
A “marriage penalty” exists when the combined tax liability of a married couple filing a joint return is greater than the sum of the tax liabilities of each individual calculated as though they were not married. Because the EITC begins to phase out as income rises, spouses filing jointly often receive a much smaller credit than they would filing separately. (The Child Tax Credit is capped at $1000 per child, but does not phase out, so it is not subject to the same penalty.)
Filing taxes jointly, however, can also result in what’s called a “marriage bonus,” occurring when a married pair pays less federal income tax than each individual would separately. This generally occurs when the couple’s earnings are so low that they only reach the threshold for claiming the full credit when their incomes are combined, or when one spouse has little or no income, so that the couple benefits from an EITC larger than when that spouse filed as a single individual. To complicate matters further, the consequences of filing jointly or separately will also depend on which spouse was legally entitled to claim the couple’s children as dependents when they filed as head of household. The Tax Policy Center’s “Marriage Bonus and Penalty Tax Calculator” shows couples where penalties and bonuses may occur as they file jointly.
Married couples have the option of filing separately, and, as with all married couples, tax preparers will need to examine each taxpayer’s family to determine whether it makes more sense to file jointly or separately.
While the American Recovery and Reinvestment Act of 2009 increased EITC marriage penalty relief by allowing married couples to receive a larger credit at slightly higher income levels, a number of proposals are in the works to reduce the penalty even further.