While most people marry for love, the financial benefits of a marriage can be a nice perk. Everything from lower insurance rates to shared health care coverage can be a bonus for your budget. However, there are also some potential financial pitfalls that married couples face. For federal and state taxes, you could get stuck with a “marriage penalty,” a quirky part of the tax law that can actually cost you a significant amount of money.
What is a Marriage Penalty?
Marriage penalties happen when the tax rate joint filers face is higher than if each spouse was a single filer. If by filing jointly, you end up in a tax bracket with a higher rate than if you filed separately, you are dealing with a marriage penalty.
For example, if you and your spouse both make $100,000 a year each, your joint income is $200,000. In Minnesota, by filing jointly, that puts you in the 9.85 percent tax bracket for state income taxes. In this case, you and your spouse would owe around $19,700 together.
But, if you were both single filers in Minnesota, you would each be in the 7.85 percent bracket. You would each owe $7,850, making your joint total only $15,700. That means, if you file jointly, you are dealing with a marriage penalty of $4,000.
Other factors aside from tax bracket can also cause marriage penalties. Exemptions, standard deductions, and credit thresholds can all lead married couples to pay more than single filers, depending on their unique circumstances.
On the federal level, the marriage penalty usually only comes into play for the highest tax bracket. However, at the state level, many more people have to contend with a marriage penalty.
States with Marriage Penalties
In total, 15 states have a marriage penalty that can affect some tax filers. They are:
- New Jersey
- New Mexico
- New York
- North Dakota
- Rhode Island
- South Carolina
Not every married couple living in the states above will necessarily have to deal with a marriage penalty. For example, in California, only the two highest brackets result in a marriage penalty, largely because the state adds an additional 1 percent tax on taxable income that breaks the $1 million mark. Without that 1 percent, there would be no marriage penalty in California.
In Georgia, Maryland, Minnesota, New Mexico, North Dakota, Ohio, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin, only couples that jointly fall in the lowest tax bracket are guaranteed to avoid the penalty. Everyone else has to pay one.
For New Jersey residents, three tax brackets have possible marriage penalties. In New York and Oklahoma, only one bracket has the potential penalty.
It’s important to note that seven other states and Washington DC appear to have a marriage penalty initially. However, they have a method for eliminating them built into the brackets, ensuring that married couples aren’t stuck paying more unnecessarily. Those seven states are:
- West Virginia
Any other state not on these two lists either has no marriage penalty potential or does not have state income taxes.
Avoiding the Marriage Penalty
In some cases, couples may be able to sidestep the marriage penalty. However, it does require filing separately, which can dramatically impact your total tax liability.
For example, filing separately may prevent you and your spouse from falling into a higher tax bracket, resulting in a savings. However, you may also lose access to certain deductions while others may be reduced, resulting in a net loss instead of a net gain.
The only way to know if filing separately will work for you is to either give it a test run or speak with a tax professional. If you prefer the DIY approach, you can use software or online filing options to calculate your taxes under each scenario. Then, you can see which one ends up being the least expensive.
When you work with a tax professional, they will essentially do the same thing. They will calculate your tax liability using both approaches, giving you insight into which option may be right for you.
You May Be Able to Explore Options to Lower Your Taxable Income
If you are just barely into a higher tax bracket when filing jointly, you can also explore other options to lower your taxable income, allowing you to fall into a lower bracket. For example, you can explore retirement account options or health savings plans. You can also strive for more deductions, which may be more challenging since the newest tax laws went into effect.
Otherwise, the only way to avoid the marriage penalty is to relocate to a state that doesn’t have one for your tax bracket or to move to a state that doesn’t levy state income taxes. In total, seven states do not have state income taxes. They are:
- South Dakota
The states above rely on sales tax entirely, so you never have to worry about a marriage penalty on your state income taxes. However, you should also consider whether those sales taxes could actually create a net loss before you decide to relocate purely to improve the outcome of your income taxes.
Do you live in a state with a marriage penalty? Tell us about your experience in the comments below.
- Injured Spouse: When Your Spouse Owes Taxes and You Don’t
- When Both Spouses Have Student Debt
- 10 Steps to Financial Security in the First 5 Years of Marriage