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Video transcript

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.