The so-called marriage penalty rule dictates that two people pay more taxes when filing as a married couple.
Through widened tax brackets and a raise in the standard deduction for joint filers, the Tax Cuts and Jobs Act (TCJA ) had mitigated that penalty somewhat. Still, for wealthy married couples, tax traps remain.
The recent tax reform helps take away some of the sting of the marriage penalty bracketing by increasing a bracket’s starting threshold for ‘married filing jointly’ (MFJ) or doubling the standard deduction for MFJ over single filers. Sometimes, instead of a marriage penalty, taxpayers can actually see a marriage bonus.
This penalty used to be found when taxpayers of equal income married. A marriage bonus can now happen when taxpayers of different incomes marry. Naturally, before marriage, the higher-income taxpayer has a higher level of taxation. After marriage, their combined income bracket could actually be lower than the more affluent taxpayer’s pre-marriage bracket.
The TCJA eliminated the marriage penalty in most taxpayers’ brackets, but taxpayers in the top two will still pay more as a married couple.
Other related tax traps for wealthy clients remain. Capital gains and the net investment income tax still have marriage penalties embedded; these mostly impact wealthy taxpayers.
Of course, high earners can take steps to mitigate the marriage penalty. This includes deferring the taxing of investment income for as long as possible, done by maxing out retirement contributions, and using annuities and life insurance as a retirement savings vehicle. Another approach is to delay Social Security benefits for as long as possible.
Life Insurance and Wealthy Clients
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Wealthy Clients Still Must Beware Of The Marriage Tax Penalty | Financial Advisor Magazine