Finance and capital markets
- Basics of US income tax rate schedule
- Tax deductions introduction
- AMT overview
- Alternative minimum tax
- Estate tax introduction
- Tax brackets and progressive taxation
- Calculating state taxes and take home pay
- Marriage penalty
- Married taxes clarification
Explore the marriage penalty and benefit in taxes. Marriage penalty happens when a married couple pays more taxes than if they were single. Marriage benefit is when they pay less. High-income couples with equal earnings may face a penalty, while couples with unequal incomes might get a benefit. Created by Sal Khan.
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- Why is there a marriage penalty in the first place?(20 votes)
- The U.S. tax system is progressive, meaning that people with higher incomes pay a higher tax rate than people with lower incomes. Generally speaking, only couples with similar, high incomes will have to pay more taxes if they file jointly versus filing as individuals. For middle class and lower income couples, they tend to benefit from filing jointly.
But in the case of couple B (5:16), the total tax paid is lower than if the person who made $180,000 and the person who made $20,000 filed separately, even though together, their combined income is the same as couple A, who earn $100,000 each. My take on this is that it attempts to discourage concentration of wealth in couples who already have high incomes, and instead encourages the wealth to be more evenly distributed in society.(21 votes)
- If USA people are both smart and make a lot of money i.e. greater than or equal to $200k/yr combined then do not get married because it saves on income taxes?
But if USA people are making less than $200k/yr combined then get married to save on income taxes?(4 votes)
- Well put, Andrew. My then future wife and I calculated that if we stayed single in 1989 and got married in 1990, we would save $72 in income tax in 1989. We looked at each other and said, what, is $72 more important than four more months of marital bliss? Twenty five year anniversary last December.(22 votes)
- Why does the marriage penalty happen anyway. So is it good getting married in the first place?(0 votes)
- The marriage penalty is the additional taxes that couples pay when filing jointly, compared to what they would pay if each person were allowed to filed individually. The penalty stems mostly from the fact that tax rates rise as income rises — and the brackets for married people and single people are different.
Yet the penalty is far from uniform. Some couples pay a much steeper penalty, and many actually receive a bonus for being married.
The largest marriage penalties fall on couples on either end of the income spectrum — poor or affluent — as well as on couples in which the two people are making similar amounts of money. Childless couples in the broad middle of the income spectrum, making between $40,000 and $175,000, tend to receive a marriage bonus instead, paying less in taxes than they would if they were filing separately.One unintended feature of the United States' income tax system is that the combined tax liability of a married couple may be higher or lower than their combined tax burden if they had remained single. This is called the marriage penalty or marriage bonus.(5 votes)
- In case of single-income couples, can the income be shown combined as a couple? And does it mean that we need to show some proof that the income is shared or is it considered by default?(1 vote)
- That is how the marriage benefit works. The total income made by both members of the couple is put into the tax formula. For couples with only one income-earner, they can end up being in a far lower tax bracket. If you are married and filing jointly, you automatically consider the income shared for tax purposes, whether or not you actually do share the income.(2 votes)
- why do they have marriage penaltys(2 votes)
- One unintended feature of the United States' income tax system is that the combined tax liability of a married couple may be higher or lower than their combined tax burden if they had remained single. This is called the marriage penalty or marriage bonus.(2 votes)
- In order to calculate how much each couple would pay in taxes wouldn't you first have to subtract the standard deduction/personal exemption for married couples from their combined income? What I'm asking is, wouldn't these deductions reduce their taxable income and the amount of tax they would be paying would be smaller than what's calculated in this video?(1 vote)
- Yes, we are assuming that the numbers given are the numbers after all of those deductions.(1 vote)
- Were the marriage penalties/benefits discussed in this video eliminated when the tax code was overhauled for tax year 2018?(1 vote)
- is it possible to not file jointly if you are married? it would save money. EDIT: nevermind, was discussed in the next video.(1 vote)
- I am assuming this idea of filing jointly was introduced a long time ago, when more typically there was one high earning individual per household (breadwinner) who would benefit from sharing their (most typically "his") income to as to be taxed less than if they filed separately. It is interesting to note that this only applied, however, to higher income earners, resulting in a Matthew effect (the rich get richer) and an increased wealth gap. Another interesting result is that with the progression of equal income between spouses, this ends up penalizing them, thus encouraging the "traditional" household of a single breadwinner. Why has this not been addressed in the many years that this law has been in effect?(1 vote)
- What is the reason/advantage of filing head of household?(1 vote)
- Head of Household tax brackets fall between those of Single and of Married. You pay less than a Single filer, but more than a Married filing Jointly, assuming total household income and deductions to be equal in all three cases.(1 vote)
Voiceover: In Couple A, right over here, I have 2 individuals who make $100,000 each in taxable income. The first thing I want to think about is how much they would pay if they were taxed as individuals. Let's look at the individual tax brackets here, and get our calculator to figure out what that would be. For each of them, the first 8,925 of taxable income is going to be taxed at 10%, and if we round, that's $893. $893. Then the next increment, from 8,925 to 36,250, is going to be taxed at 15%. I pre-calculated what that is. That's $4,099, rounding a bit. 4,099. Then the increment up to $87,850 is going to be taxed at 25%, and that gets us $12,900. Then the increment above 87,850, this is essentially the bracket they fall into, because they make less than $183,250, that's going to be taxed at 28%. It's going to be + .28 x the increment above 87,850, so we have 100,000 of taxable income. Do I have the right number of zeros? Let me see; 1 ... That's 100; that's 10,000 right now. That is 100,000; did I do that? Yeah, 100,000 - 87,850. 87,850, gets us to $21,294. This is what they would each pay as individuals, but we're going to look at them as a couple, so as a couple, both of them combined, if we multiply by 2, both of them are combined, if they were taxed as individuals, or if they had never got married, and, I don't know, they just lived together, what their combined taxes would be, is $42,588. So $42,588, combined, if they're not married. Now let's think about how much they would pay as a married couple, where they have $200,000 of combined taxable income. Now we would look at the filing jointly married brackets, and even if you're married and you file as individuals, your brackets are essentially going to be half of these brackets right over here, so it comes out economically equivalent, or it comes out economically equivalent if you make the same incomes. We're going to talk about that a little bit more. Let's look at this married, filing jointly, scenario for Couple A. Let's get the calculator back out. Now we'll look at the married brackets. So the first 17,850 is going to be taxed at 10%. You might already notice that, at least these first few brackets are exactly twice the numbers as these brackets right over here, and the general idea is you now have 2 people, so they can essentially have twice the income before they fall into another bracket. But that keeps on going until you get to this point right over here, and that's actually the whole point of this video; to explore whether this results in married couples paying larger or smaller taxes. Let's think about how much this couple's paying. The first 17,850, 10%; that's $1,785. Then the increment up to 72,500 is going to be taxed at 15%. Pre-calculated, that is $8,188, right over there. Then the increment up to 146,400 is going to be taxed at 25%. Pre-calculated that as $18,475. Oh, I don't want to have that. Let me delete one of these plus signs. Then, finally, finally, we fall into this bracket right over here. It's going to be taxed at 20%. The increment above 146,400, the increment above that is going to be taxed at 28%, so it's 28% x 200,000. 200, 1, 2, 3, - 146,400, and we get combined taxes of 43,456. 43,456. Now, what immediately jumps out at you? Well, first, these are not the same number. In particular, when they're married, they pay higher taxes, so this couple, that they have fairly high income, and they both make the same amount, they would have actually paid fewer taxes if they never got married, and if they just filed as individuals. Now, when they're married, they're paying more taxes, and the main idea is, they fall into this bracket, and this bracket came faster than twice the rate at which this bracket came, when they were just filing individually, and so they fell into the 28% bracket faster, so they had to pay 28% on more of their combined income; they ended up having a bigger tax bill. When people talk about the marriage penalty, this is what they're talking about. These people are essentially paying a tax because they got married. This is the marriage penalty. Now, let's explore if there's always a marriage penalty. If there's always a case, that if by getting married, you're going to pay more by income taxes. Here we have Couple B, and they have less equal income. They still have a combined income of $200,000, so if you look at the married filing jointly, they're still going to pay 43,456 when they file jointly, but let's see how much they would pay if they were individuals; if they never got married, and we combine how much they would have had to pay. Let's get the calculator back out. First we're going to think about the first member of the couple, who makes 180,000 in taxable income. They're going to pay 10% on the first 8,925, so that's 893, and then we can add that to 4,099; we've done this already. 4,099. To that we could add 12,900. 12,900. And then, to that, we're going to add 28% of the increment above ... so he makes or she makes 180,000. 180, 1, 2, 3, - 87,850. 87,850. So that's the increment above 87,850, and we get this spouse, this member of the couple, is going to pay 43,694. Now, to that we're going to have to add the amount that the other member that might pay. He is going to pay 893 on the first 8,925, so it's going to be 893 plus the 15% of the increment above 8,925. So, + .15 x 20,000; 1, 2, 3, - 8,925, gets us to, this member of the couple is going to pay, let's see, 2,554 in taxes. If we add it to the other member of the couple, so we add that answer + 43,694, that's what the larger earner is going to have to pay in taxes, we get 46,248; we'll just round to that. 46,248. So here, all of a sudden, we see a scenario where the opposite thing; the higher value is if they don't get married. In this situation, they actually got a marriage benefit. They got a marriage benefit. Now, why did this happen? The thing that might have jumped out to you, both of these people had high incomes, and they had very equal incomes, while both of these people, their combined income was the same, but there was less equal, and so essentially what happened here, this person filed by themselves; on the individual tax bracket, they go up the brackets very, very, very, very quickly, and then this person, well, they're not paying much in taxes, but this person is paying the bulk of it. By becoming a couple, by getting married, as a combined entity, and pretty much this is the main beneficiary, that 180,000 in taxable income, that's most of the 200,000, they're able to move up the tax brackets a lot slower, so they're getting taxed at 28% on a much smaller fraction of their income. They're getting taxed at 25% on a much smaller fraction of their income. They're getting taxed at 10% on a larger fraction of the income than when, especially this individual right over here, filed as an individual. In general, if you have a couple with very high taxable income, and they both make roughly equal, they both have very high taxable incomes as individuals, they are likely to see a marriage penalty, like we saw in scenario 1. If you have a couple where their salaries are very unequal, even if their combined salaries are quite high, you actually might get a marriage benefit, because they move through the tax brackets faster. Now let's think about Couple C, and I'll let you think about it a little bit. You have equal taxable incomes here, so it's like Couple A, but their total taxable income isn't high. In fact, if you look at the married filing jointly, they fall under this tax bracket right over here. And, notice, up to this point, all the tax brackets are exactly double the individual tax bracket, so it goes exactly twice as slow. I guess you could think about it as a fraction of income, when you have 2 people making the same, you're having the same fraction taxed at 20% or at 15% or at 25%. I encourage you to do the math here. It's just good practice, but what you're going to see, is these people are going to pay the same taxes. This is going to be the same whether or not they are married or not married, because they're not making enough combined income to get the penalty, where the brackets start accelerating a little bit faster. Anyway, hopefully that clarifies things a little bit.