It pays to be single -- that is, when it comes to high earners' tax bills.
U.S. taxpayers with income of more than $200,000 a year will see federal tax rates rise this year
on wages and investments. Tax increases will pinch married couples faster than individuals, especially if both spouses work and have capital gains and dividend income, said Joseph Perry, partner- in-charge of tax and business services at the accounting firm Marcum LLP.
In the law passed by Congress Jan. 1, multiple thresholds for higher rates kick in for married couples only $50,000 above where they hit for singles. Married taxpayers with income of at least $300,000 also face limits on the value of deductions and personal exemptions that were reinstated for 2013.
"If they're sending a message, it's not to be married," Perry said of U.S. tax policy. "People who are married, working, earning two good salaries, are being penalized."
The budget deal struck by Congress and new taxes stemming from the 2010 health-care law are exacerbating the long- established marriage penalty for high earners. The added bite will affect taxes they pay for 2013, and not the current filing season that starts this month.
Accountants and wealth advisers are recommending that high earners start planning and strategizing about how they recognize income from investments or when they take deductions.
Crossover Point
Three thresholds are now in effect at which higher taxes can affect top earners. Taxable income exceeding $450,000 a year for married couples and $400,000 for singles is the crossover point to the top income-tax bracket of 39.6 percent, from 35 percent, and the 20 percent rate for capital gains and dividends, compared with 15 percent.
The second threshold starts at adjusted gross income of more than $250,000 for married couples compared with $200,000 for individuals. Those are the markers for a new 3.8 percent surtax on investment income and a 0.9 percent added levy on wages starting this year. Both were enacted in 2010 to help finance the expansion of medical coverage.
Limits on the value of deductions and personal exemptions start at a third level: $300,000 a year for married couples and $250,000 for individuals.
Consider a couple living in New York state with each earning $280,000 in annual wages -- for a combined $560,000. The couple will pay about $22,000 more in taxes this year if they are married filing jointly than if they were single, according to an analysis by Perry. That assumes each of them has $20,000 in capital gains and dividends as well as $35,500 each in deductions for charitable contributions, mortgage interest and real estate taxes.
Personal Exemptions
As a married couple, more of their income is subject to the phase-outs on personal exemptions and limits on itemized deductions as well as the higher taxes on wages and investment income from both the health-care law and budget deal.
"They made it worse because of where they set the brackets," Perry said of the marriage penalty as it applies to high-earning, married couples.
That's because the thresholds for individuals and married couples at the higher rates are close together, said Scott Kaplowitch, a partner at the Boston-based accounting firm of Edelstein & Co. LLP.
"$50,000 isn't really a big spread," Kaplowitch said. "People may just cohabitate because it's better from a tax perspective."
Varying Rates
Penalties -- and bonuses -- for being married or single have existed in the tax code for decades because the system is based on household income and the rates vary, saidEugene Steuerle, co-founder of the Washington-based Tax Policy Center.
Lawmakers have adjusted since the 1940s where to set income- tax brackets to address inequities among different types of families including married couples and singles, said Dennis Ventry, a professor at the University of California, Davis School of Law who specializes in family taxation. Families often feel the so-called marriage penalty if they don't account for it when deciding how much to withhold from their paychecks throughout the year for taxes, Ventry said.
The marriage penalty also affects lower-income households who may phase out of benefits such as the earned income tax credit because as a couple their income is too high, he said.
President George W. Bush's income-tax cuts reduced the marriage penalty by setting the 10 percent and 15 percent brackets for married couples at double the amount for individuals, which essentially splits a couple's income for tax purposes, Steuerle said.
Budget Deal
The budget deal passed Jan. 1 extended marriage-penalty relief for those brackets and for the standard deduction, which is used by those who don't itemize. While that helped married couples in the lower-to-middle income tax brackets, the law didn't apply the same relief to top earners, Steuerle said.
"Among the people most likely to be caught by this are two professionals, highly paid doctors or lawyers," said Steuerle, whose Tax Policy Center is funded by the Brookings Institution and the Urban Institute.
High earners with significant income from capital gains and dividends may feel a bigger tax bite because they are married.
A married couple with taxable income of $600,000 a year is subject to the top 20 percent rate because they exceed the $450,000 threshold, while if they each recognized $300,000 individually they would pay at the 15 percent rate. That doesn't include the 3.8 percent investment-income surtax.
Early Planning
The multiple levels of higher rates mean families should start planning early this year because there are ways to save on taxes or reduce their sting.
Married couples should review their withholding to make sure they are taking out enough from their paychecks for taxes, Ventry said. The higher-earning spouse usually should be the one accounting for the family's exemptions and any additional withholding, because they are in the higher bracket, he said.
Couples also should consider installment sales of appreciated assets such as real estate or stakes in a business, said Baker Crow, senior vice president of the private wealth management group at Regions Financial Corp. That can help spread the income received over more than one year, he said.
Socking away investments that generate income in tax- deferred individual retirement accounts as well as harvesting losses throughout the year to offset gains are strategies for married couples, said Kent Kramer, chief investment officer of the investment advisory firm Foster Group.
Timing Deductions
Timing of deductions also will be more of a focus this year, said Susan Bruno, an accountant and financial planner at Beacon Wealth Consulting LLC.
"If you have unusually high income one year, that's probably not the year you want to make your normal contributions and deductions," Bruno said.
The option for a married couple to file separately rather than jointly is still generally more expensive even with the higher rates, said Marcum's Perry. And while couples face a marriage penalty, advisers aren't seriously recommending divorce for tax reasons.
Some tax-conscious high earners who haven't yet married may see staying single as a way to avoid the penalty. Steuerle, though, says there are other financial advantages to marriage such as the way Social Security benefits are structured.
"People who are less concerned about the formal marriage vow have more ability" to avoid the penalty, he said.
U.S. taxpayers with income of more than $200,000 a year will see federal tax rates rise this year
on wages and investments. Tax increases will pinch married couples faster than individuals, especially if both spouses work and have capital gains and dividend income, said Joseph Perry, partner- in-charge of tax and business services at the accounting firm Marcum LLP.
In the law passed by Congress Jan. 1, multiple thresholds for higher rates kick in for married couples only $50,000 above where they hit for singles. Married taxpayers with income of at least $300,000 also face limits on the value of deductions and personal exemptions that were reinstated for 2013.
"If they're sending a message, it's not to be married," Perry said of U.S. tax policy. "People who are married, working, earning two good salaries, are being penalized."
The budget deal struck by Congress and new taxes stemming from the 2010 health-care law are exacerbating the long- established marriage penalty for high earners. The added bite will affect taxes they pay for 2013, and not the current filing season that starts this month.
Accountants and wealth advisers are recommending that high earners start planning and strategizing about how they recognize income from investments or when they take deductions.
Crossover Point
Three thresholds are now in effect at which higher taxes can affect top earners. Taxable income exceeding $450,000 a year for married couples and $400,000 for singles is the crossover point to the top income-tax bracket of 39.6 percent, from 35 percent, and the 20 percent rate for capital gains and dividends, compared with 15 percent.
The second threshold starts at adjusted gross income of more than $250,000 for married couples compared with $200,000 for individuals. Those are the markers for a new 3.8 percent surtax on investment income and a 0.9 percent added levy on wages starting this year. Both were enacted in 2010 to help finance the expansion of medical coverage.
Limits on the value of deductions and personal exemptions start at a third level: $300,000 a year for married couples and $250,000 for individuals.
Consider a couple living in New York state with each earning $280,000 in annual wages -- for a combined $560,000. The couple will pay about $22,000 more in taxes this year if they are married filing jointly than if they were single, according to an analysis by Perry. That assumes each of them has $20,000 in capital gains and dividends as well as $35,500 each in deductions for charitable contributions, mortgage interest and real estate taxes.
Personal Exemptions
As a married couple, more of their income is subject to the phase-outs on personal exemptions and limits on itemized deductions as well as the higher taxes on wages and investment income from both the health-care law and budget deal.
"They made it worse because of where they set the brackets," Perry said of the marriage penalty as it applies to high-earning, married couples.
That's because the thresholds for individuals and married couples at the higher rates are close together, said Scott Kaplowitch, a partner at the Boston-based accounting firm of Edelstein & Co. LLP.
"$50,000 isn't really a big spread," Kaplowitch said. "People may just cohabitate because it's better from a tax perspective."
Varying Rates
Penalties -- and bonuses -- for being married or single have existed in the tax code for decades because the system is based on household income and the rates vary, saidEugene Steuerle, co-founder of the Washington-based Tax Policy Center.
Lawmakers have adjusted since the 1940s where to set income- tax brackets to address inequities among different types of families including married couples and singles, said Dennis Ventry, a professor at the University of California, Davis School of Law who specializes in family taxation. Families often feel the so-called marriage penalty if they don't account for it when deciding how much to withhold from their paychecks throughout the year for taxes, Ventry said.
The marriage penalty also affects lower-income households who may phase out of benefits such as the earned income tax credit because as a couple their income is too high, he said.
President George W. Bush's income-tax cuts reduced the marriage penalty by setting the 10 percent and 15 percent brackets for married couples at double the amount for individuals, which essentially splits a couple's income for tax purposes, Steuerle said.
Budget Deal
The budget deal passed Jan. 1 extended marriage-penalty relief for those brackets and for the standard deduction, which is used by those who don't itemize. While that helped married couples in the lower-to-middle income tax brackets, the law didn't apply the same relief to top earners, Steuerle said.
"Among the people most likely to be caught by this are two professionals, highly paid doctors or lawyers," said Steuerle, whose Tax Policy Center is funded by the Brookings Institution and the Urban Institute.
High earners with significant income from capital gains and dividends may feel a bigger tax bite because they are married.
A married couple with taxable income of $600,000 a year is subject to the top 20 percent rate because they exceed the $450,000 threshold, while if they each recognized $300,000 individually they would pay at the 15 percent rate. That doesn't include the 3.8 percent investment-income surtax.
Early Planning
The multiple levels of higher rates mean families should start planning early this year because there are ways to save on taxes or reduce their sting.
Married couples should review their withholding to make sure they are taking out enough from their paychecks for taxes, Ventry said. The higher-earning spouse usually should be the one accounting for the family's exemptions and any additional withholding, because they are in the higher bracket, he said.
Couples also should consider installment sales of appreciated assets such as real estate or stakes in a business, said Baker Crow, senior vice president of the private wealth management group at Regions Financial Corp. That can help spread the income received over more than one year, he said.
Socking away investments that generate income in tax- deferred individual retirement accounts as well as harvesting losses throughout the year to offset gains are strategies for married couples, said Kent Kramer, chief investment officer of the investment advisory firm Foster Group.
Timing Deductions
Timing of deductions also will be more of a focus this year, said Susan Bruno, an accountant and financial planner at Beacon Wealth Consulting LLC.
"If you have unusually high income one year, that's probably not the year you want to make your normal contributions and deductions," Bruno said.
The option for a married couple to file separately rather than jointly is still generally more expensive even with the higher rates, said Marcum's Perry. And while couples face a marriage penalty, advisers aren't seriously recommending divorce for tax reasons.
Some tax-conscious high earners who haven't yet married may see staying single as a way to avoid the penalty. Steuerle, though, says there are other financial advantages to marriage such as the way Social Security benefits are structured.
"People who are less concerned about the formal marriage vow have more ability" to avoid the penalty, he said.
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