In “New Year’s Resolutions for the Country” I wrote:
Revenue is maximized by an economic freedom that encourages as much free enterprise as possible coupled with a flat tax. The current legislative compromise punishes married couples who are both productive. Spouses who each earn $250,000 with an additional $100,000 in capital gains will pay about $27,000 more than an unmarried couple who simply live together.
Here is my understanding of how much more a married couple has to pay simply because they are legally married:
Michael and Ashley are just living together. They each earn $250,000 and have $100,000 in capital gains. They haven’t released all of the details of the tax code compromise, but I am assuming these tax rates:
Therefore their income tax is $67,558 (($8,950 * 10%) + ($27,300 * 15%) + ($51,600 * 25%) + ($95,400 * 28%) + ($20,350 * 33%) + ($46,400 * 35%)). For both of them the tax would be $135,115.
They would owe $1,900 for the Obamacare surtax ($50,000 * 3.8%). The 3.8% Obamacare tax applies to the lesser of capital gains or earned income over $200,000 if you are single or $250,000 if you are married. Since Michael and Ashely are just living together they each get $200,000 of earned income before the tax kicks in. Even though they have $100,000 of capital gains, they would only be taxed on $50,000 because they only earn $50,000 over the $200,000 threshold. For both of them the tax would be $3,800.
They would owe $15,000 in normal capital gains tax. As I understand the new tax code the capital gains tax on their $100,000 of capital gains will remain at 15% for those single earning under $400,000 or married earning under $450,000. For both of them the tax would be $30,000.
And finally, I believe that Michael and Ashley would not be subject to deduction phase outs. Detailed information on the tax compromise is difficult to find, but I believe that those earning under $250,000 would not experience these deduction phase out.
And now for the marriage penalties…
James and Linda are legally married. They each have the same earnings as Michael and Ashley, but their incomes are combined when it comes to federal taxation. They have earned income of $500,000 and capital gains of $200,000.
Therefore their income tax is $148,671 (($17,900 * 10%) + ($54,600 * 15%) + ($73,900 * 25%) + ($76,650 * 28%) + ($23,950 * 33%) + ($203,000 * 35%) + ($50,000 * 39.6%)). The would pay $13,556 more because of the tax brackets because they are married.
They would owe $7,600 for the Obamacare surtax. Since the earned income threshold for a couple is only $250,000, they are taxed on the lesser of the full $200,000 in capital gains or the $250,000 earned income which is over the $250,000 limit. They would pay $3,800 more because they are married.
They would owe $40,000 in normal capital gains tax. As I understand the new tax code the capital gains tax on their $200,000 of capital gains will be at 20% for those single earning over $400,000 or married earning over $450,000. They would pay $10,000 more because they are married.
Finally, James and Linda would be subject to the deduction phase outs. These phase outs are equivalent to an additional tax on income of about 1.2%. As a result they would pay $6,000 more because they are married.
CONCLUSION: James and Linda would have to pay $33,356 more than Michael and Ashley earning the exact same amounts simply because they are married and not living together.
So in the original article I underestimated the marriage penalty. It will be worse than I thought. You cannot argue this increased tax is their “fair share” simply because they are married.
Please refrain from comments such as “Nobody I know makes this much money.” I work with small business owners most of whom fall into similar tax situations. Many would significantly benefit financially from not being married. Comments about how few people are oppressed with unfair taxes are as bigoted and biased as if they had been made about a racial group. And comments about how you personal don’t know any just show your own ignorance.
I continue to be amazed by the financial slurs thrown at the most productive members of our society. There is a growing financial bigotry against people with productive lifestyles. They show a hatred amongst the left that against any other group would be universally condemned.
As I wrote in the the article: “The fairest taxes are levied equally on each person or equally on each dollar.”
Subscribe to Marotta On Money to stay current on the latest wealth management advice and receive free premium access to several video presentations