It’s been said that you can’t tell the players without a scorecard. Where I need a scorecard is to figure out which tax provisions expired at the end of 2011, and those slated to give up the ghost at the end of 2012. Luckily, the Joint Economic Committee has a Web site that lists all of the expiring provisions of recent memory, together with the dates they expired or will expire.
One of them, the marriage penalty relief provision, hasn’t garnered all the attention it might have, in part because biggies such as the AMT exemption tend to pre-empt any interest in some of the lesser provisions.
But marriage penalty relief, along with the AMT exemption and the Bush tax cuts, is set to expire at the end of this year, and will affect the tax liability of over 40 percent of the taxpaying public, according to the Congressional Budget Office.
“Starting in 2013, the system will revert to the old rules, and the marriage penalty will come back into play,” said Ernst & Young tax partner Greg Rosica.
The fix for the marriage penalty was to make the standard deduction double that of a single person’s deduction, and also make the lower rate brackets double the level at which you entered the next bracket from that of a single or two single filers.
Without the relief, “when you have income gaps between two spouses, there’s less chance that there will be a penalty,” said Rosica. “When spouses have similar incomes, historically that’s when there was a marriage penalty.”
The amount of the penalty is not insignificant, Rosica said, but it’s not thousands of dollars either. “When you quantify the dollar amount, the typical penalty was $1,400,” he said.
Rosica doesn’t recommend divorce to escape the penalty. “There are lots of other things less expensive for a married couple than for two singles,” he said. “Look at the situation and try to balance it out. If one is self-employed, there may be a way to balance the income.”
For taxpayers in this situation, it’s also important to analyze whether using the filing status of married filing separately makes sense over married filing jointly, Rosica indicated. “Generally, married filing jointly is more advantageous because of the benefit of the standard deduction,” he said. “Provisions such as IRA limitations, and capital loss limitations, are more beneficial to a couple using the MFJ status. If they were filing separately, they would lose some of these benefits.”
Far from an unintended quirk in the way the Tax Code is arranged, the marriage penalty results from a conscious decisions to address what was previously an advantage for married couples compared to singles.
If and when the expiring tax provisions are renewed, marriage penalty relief will be renewed. “This is automatically built in,” said Rosica. “It’s not a separate item, because it breaks at the income levels. If some kind of extension carries forward the existing rate structures and brackets that we have, this would be renewed along with it.”
And that’s a relief.
