The tax package House Democrats unveiled this week would increase the so-called marriage penalty for wealthy couples.
Couples who file a joint tax return experience a marriage penalty if their income-tax bill is larger than the one they’d get filing as single taxpayers.
A penalty is more common when each spouse earns a similar income, according to the Tax Policy Center. Penalties exist in current rules, though the 2017 Republican tax law reduced their scope.
The House legislation — which raises about $2.1 trillion in taxes over a decade from corporations and the wealthy to finance an expansion of the U.S. safety net and other measures — increases the existing penalty.
The proposal would raise the top income-tax rate to 39.6% from 37%. A single filer with more than $400,000 of income in 2022 would pay that rate. However, the $450,000 income threshold for married couples filing a joint return isn’t much higher. (It’d have to be double, or $800,000, to avoid a marriage penalty in this context.)
(Currently, a single filer with more than $523,600 of income pays the top rate, compared with $628,300 for married couples.)
“There’s clearly a bigger marriage penalty,” Leon LaBrecque, an accountant and certified financial planner at Sequoia Financial Group, said of the House legislation.
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The penalty’s impact would extend beyond income tax on wages. A new 25% top federal tax rate on investment income (from appreciated stock and dividends) would also kick in at the $400,000 (singles) and $450,000 (married) levels in 2022.
“It’s not everyday Americans [who’d be affected by the change],” Paul Auslander, a CFP and the director of financial planning at ProVise Management Group, said of the income range. “It’s pretty high.”‘
Depending on the couple, the change could amount to several thousand dollars of extra tax per year, he said.
“That’s not chump change,” he said. “It’s not going to break anybody, but it’s an annoyance.”
Several revisions may occur as lawmakers continue to debate the contours of the broad package, which may cost as much as $3.5 trillion.
The legislation’s success also isn’t guaranteed due to Democrats’ razor-thin margins in the House and Senate and competing visions for how the richest Americans should be taxed.
House Democrats likely established the income bands for married couples to raise more money for their agenda, Auslander said. Reducing or getting rid of the marriage penalty would mean less tax revenue.
As is, the top tax rate and income bands proposed would raise $170.5 billion over a decade, according to the Joint Committee on Taxation, which is Congress’ nonpartisan tax scorekeeper.
If the marriage penalty remains intact through the legislative process, high-income couples may change their financial plans.
For example, couples may consider filing separate tax returns or even staying single, LaBrecque said.
Filing a separate tax returns frequently results in a higher tax liability under current law, according to the Tax Policy Center.
However, the House legislation may not make this route a money-saver for many people — couples filing separate returns would hit the top 39.6% bracket after $250,000 of income.