Celebrate the Divorce of Love and Taxes

Physician's Money DigestJuly31 2004
Volume 11
Issue 14

The words "I do" for newly married couples symbolize a lifelong bond of commitment, loyalty, and unconditional love. However, once these golden words are uttered, your vow of love binds you to paying more taxes. In the past, tax penalties have steered many savvy investors away from walking down the aisle. But today, there are no financial excuses to not get married, thanks to the Marriage Tax Relief Act of 2000.

America's Love Tax

The third-largest tax cut in US history became law last year. Prior to the act's passage, the marriage tax penalty required higher taxes for married couples than for two single individuals with the same income. Married couples experienced two tax consequences.

First, the standard deduction that married people were allowed to claim was less than the total the two of them could deduct when they were single, resulting in higher taxes. According to the National Center of Policy Analysis (NCPA; www.ncpa.org), in 2000, the standard deduction was $7350 for a couple filing jointly and $4400 for single filers. Thus, a couple filing jointly would pay taxes on the $1450 difference, which would create a tax penalty of over $217.50 at the 15% tax rate.

Second, predetermined tax brackets also hurt married couples. The NCPA points out that while single filers would enter the 28% bracket at $26,250 of taxable income, a married couple would pay the 28% marginal tax rate at $43,850 and be responsible for a penalty of $1124.50.

Happily Ever After

The Marriage Tax Relief Act has lightened the tax burden for couples. The tax change has made the 15% tax bracket for married couples twice that of single filers for those couples who don't itemize. In addition, the new tax law increased the standard deduction for married filers to $9500, which is twice the deduction afforded to single filers.

There is a slight downside, however. The relief is only temporary. According to the IRS, for taxable years beginning after 2004, the rate bracket reverts to the levels prescribed under the present law. In other words, next year, the width of the 15% bracket for married taxpayers filing joint returns will be 180% of the 15% bracket for single returns.

Future bracket:

Despite this, there is still a light at the end of the tunnel. A gradual elimination of the marriage tax goes into effect in 2005. In subsequent years, there will be a decrease in the 15% tax bracket compared with this year's relief (eg, 180% for 2005, 187% for 2006, and 193% for 2007). In 2008, the 15% tax bracket for married taxpayers will be double that of the 15% bracket for single taxpayers.

According to the IRS Web site (www.irs.com), although the standard deduction for married couples will be double that of single filers this year, there will also be a gradual percentage decline over the approaching years (eg, 174% for 2005, 184% for 2006, 187% for 2007, and 190% for 2008). By 2009, the marriage tax penalty should be completely eliminated. So start saving your pennies. It's time to propose to your sweetheart.

Genevieve Valentine has a strong background in ethical research and the investment industry. She works full-time for the Valentine Capital Asset Management of San Ramon, Calif, and is the chief editor of their "High Net-Worth Newsletter," published monthly. She is currently working on her master's degree in ethics. She welcomes questions or comments at 925-275-0200 or visit www.vcrpg.com.

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