​​There are a lot of  positive things about getting married, but the IRS' marriage penalty isn't one of them. The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code. Thankfully, legislation in recent years is shrinking the problem, but it still exists. Here is what you need to know.

Tax Social Security benefits
Probably the worst example of the ongoing marriage penalty is imposed on older couples. Talk about insult! You make it to retirement as a couple and then get your Social Security taxed more quickly. This occurs because two single seniors start getting their Social Security retirement benefits taxed when their income exceeds $25,000. So the married threshold should be $50,000, right? Nope, it is $32,000. When you consider up to 85% of this benefit is taxable, is it a marriage penalty on couples that can least afford it!

Accelerating phase-outs
The tax code is filled with various income phaseouts for benefits, credits and deductions. Thankfully most now have the marriage penalty taken out, but it still exists in things like the Adoption Credit and Roth IRA contribution limits. But probably the worse example is that the earned income tax credit (EITC) phase-outs favor single versus married taxpayers. A single mother of three in 2021 can qualify for the EITC with income less than $51,464, while a married couple loses the EITC with combined income over $57,414. This is often one of the driving reasons for not marrying when you have lower income and children are in the home.

Affordable Care Act piles onto the marriage penalty
The Affordable Care Act also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry.

Even Itemizing deductions favors single taxpayers
One of the new provisions in the tax code that limits itemizing deductions is the $10,000 upper limit on taxes, like property taxes and sales taxes, that can be used for itemizing deductions for a single taxpayer. The limit for a married couple? Not $20,000. It is the same $10,000! Congress must not think a family may need a bigger place to stay or need to spend more for the extra family members.

The tax rate problem is now better
However, there is some good news on the marriage penalty front. Prior to law changes in 2017, most married couples paid higher tax rates than if they were two single people. This penalty is now eliminated for all but the highest earners. The marriage penalty now comes into play in the 34% tax bracket that begins with combined incomes well over $200,000. Most of us can see the results of this penalty in the news as celebrities conduct their tax planning and delay or avoid tying the knot.

The most import part of the marriage penalty is awareness of the problem. By knowing the tax pitfalls you can plan around them, and perhaps influence a change for the future.

 
As your children grow older, you can easily be surprised by a larger tax bill. To help ease the possible burden, consider these tax implications as your dependent children age.

A higher tax bill in your future
At age 6: Loss of excess Child Tax Credit. In 2021, the Child Tax Credit is $3,600 for children under the age of 6. This is an extra $600 that will go away after your child ages out of the benefit. Even more important this benefit is currently scheduled to disappear after 2021.

At age 13: loss of your Dependent Care Credit. If your children are in daycare and you offset some of this cost with the Dependent Care Credit you will lose this benefit when they reach age 13. The impact: a 50% credit against up to $16,000 in qualified daycare expenses in 2021. The good news here is that your children may no longer need the care as they get older.

At age 17 or 18: loss of the Child Tax Credit. While children under the age of 6 get an extra $600, after the age of 17 the balance of this credit goes away. This could amount to a tax bill increase of $2,000 to $3,000 per child, depending on your income. But stay tuned, Congress is actively looking to change this tax benefit.

At age 19 (24 if a full-time student): loss of the Earned Income Tax Credit (EITC). The EITC pays a potential credit worth up to $6,728 for people with three or more qualifying children. Children stop being counted when they turn 19, or when they are 24 if they are full-time students.

What to do
Many of the child-related credits and deductions are meant to offset the cost of raising a child. Prepare now for the inevitable change in your tax situation that occurs when they go away. Here are some ideas:

• Know the age triggers. Note the tax years that these changes will occur. If a child is approaching one of these key years, adjust your spending to save a little more during the year to account for the change.
• Revise your withholdings. At the beginning of each key year, look at adjusting your withholdings on your paycheck to ease the potential tax burden.
• Conduct a tax forecast. Understand what the true impact of the change might be. You may find the tax hit less of a burden than you think. If you need help planning ahead, don’t hesitate to call.
  

"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office. 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA