The “marriage penalty” occurs when two individuals pay more tax as a married couple than they would as single individuals. The newly passed Tax Cuts and Jobs Act (TCJA) eliminates some of the marriage penalty, but it introduces it in another area of the tax code.
Lowering the penalty of being married: Prior to the TCJA, the marriage penalty affected taxpayers in the mid to upper tax brackets. The brackets for married couples at those levels were not double the equivalent brackets for single individuals. The income tax brackets for married filers are now double those for single filers, except for the top 37% marginal rate.
Even though the marriage penalty has gone away for taxpayers in most tax brackets, more people are being subjected to a marriage penalty in another area: itemized deductions.
The itemized deductions marriage penalty: The itemized deduction for state and local taxes (SALT) now has marriage penalty implications. Starting in 2018. Taxpayers can deduct up to $10,000 of SALT paid. That limit applies to combined total of property taxes and either income taxes or sales taxes. This cap is the same for married couples and single filers, meaning that it’s effectively halved as soon as you get married.
So married couples claiming the standard deduction get to claim double the standard deduction of single filers, couples who itemize don’t receive double the SALT deduction.
What this means for married taxpayers: Single taxpayers in states with high income or property taxes will continue to itemize deductions because a $10,000 SALT deduction combined with mortgage interest and charitable contributions may easily surpass the value of the $12,000 standard deduction. Married couples, however, may have a much harder time getting more value out of SALT deduction plus other itemized deductions than they would taking the $24,000 standard deduction.
You can still find tax breaks: Despite the possible pitfalls created by the TCJA, there are still opportunities to find tax savings. Tax-loss harvesting, charitable contributions and tax advantaged retirement contributions are just a few areas where you can unlock the extra value with smart planning.
Changes to the tax code often create new opportunities. Tax planning for 2018 is really necessary to fully understand all of the implicates of the TCJA so you know where you stand before 2018 comes to an end and you find that you have a large tax bill due to the changes in the withholding tables that may cause too little tax to be withheld from you wages. The tax tables do not consider more than the one income on which they are withholding. So, when you add a spouse’s income or other income to the mix, we are finding that our clients are not having enough withheld and will owe with the filing of their 2018 tax return. Better to know in advance than deal with the surprise come early 2019.