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Weddings are not cheap, by any means. After you factor in the costs of sending invitations, throwing the ceremony, catering the reception and paying for the honeymoon, many couples find that they have spent a small fortune just to get hitched. Unfortunately, Uncle Sam doesn't make things any easier, causing many married couples to pay higher taxes once they have given their vows.
Sound hard to believe? Think again. Uncle Sam's so-called "marriage penalty" impacts over 40% of married couples, boosting annual taxes for these couples. The penalty can be steep, especially for two-income couples where both incomes are fairly equal. When both incomes are combined, many couples are pushed into the next tax bracket, triggering higher taxes on April 15th. If one spouse makes substantially more than the other, there may be no penalty attached. In fact, modest changes in a married couple's tax rate could earn those couples with only one "breadwinner" a marriage bonus in the form of reduced taxes. However, more and more households are two-income families, meaning the marriage penalty may be taking a larger bite out of disposable income. Here's how the marriage penalty works:
Married couples are penalized in other ways, as well. For instance, when it comes to conversions, fewer married couples can convert a traditional IRA to one of the new Roth or Education IRAs. The ability to convert to a Roth IRA or Education IRA is completely wiped out when AGI hits $160,000. Two spouses earning $85,000 per year or more would be locked into their traditional IRA. Married couples with equal incomes also may lose out on the $1,500 Hope education tax credit. The Hope tax credit, designed to encourage college saving, is shot down once an individual or couple's AGI hits the $100,000 mark. When you consider a two income family, that limit can be reached very quickly, and some couples may be surprised they can't take advantage of some of the newest tax breaks out there.
How can you avoid the marriage penalty? The obvious answer is to stay single longer. Many couples are doing just that, opting to postpone marriage because of the greater expense involved. Realisitically, postponing a marriage is not always an option. You can also write your Congressman to have the laws changed. In recent months, Republican lawmakers have been clamoring to eliminate the "marriage penalty." However, the General Accounting Office estimates that doing so would cost the U.S. Treasury upwards of $144 billion over the next five years. Considering increased military expenditures, especially in Kosovo, and the need to shore up Social Security, some analysts on Capitol Hill are predicting such legislation may be shelved for a while. Many lawmakers can be contacted through the Senate and Congressional websites.
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