For many years, Congress has passed income tax laws designed to mitigate the so-called marriage penalty. The marriage penalty occurs when a married couple with similar incomes incurs a higher tax liability by filing taxes jointly than if they would have filed as two single taxpayers. Examples of such provisions by Congress to attempt to alleviate this additional tax burden include lower income tax brackets, increased alternative minimum tax exemption amounts, and most notably, a higher standard deduction for married taxpayers filing jointly.
The 2017 Tax Cuts and Jobs Act (TCJA) took a step backwards in the effort to mitigate the marriage penalty. While the standard deduction for married couples filing jointly is twice the standard deduction of single taxpayers, the TJCA limited the itemized deduction for state and local taxes (SALT) to $10,000 for both single taxpayers and those filing married jointly. State and local taxes include income or general sales taxes, real estate taxes, and personal property taxes. A married couple can easily exceed this threshold with state income taxes alone, resulting in the loss of any income taxes in excess of $10,000 and all real estate and property taxes. Although the standard deduction for married filing jointly remained twice that of single taxpayers under the TCJA, the same limitation on state and local taxes made it more difficult for those filing jointly to itemize deductions.
While the standard deduction for married filing jointly ($24,800) is twice the deduction for single taxpayers ($12,400) for 2020, married taxpayers must have $12,400 more in itemized deductions to benefit from itemized deductions. Three other main categories of itemized deductions, other than SALT, include medical expenses, mortgage interest, and charitable contributions. Only medical expenses in excess of 7.5% of adjusted gross income are deductible. Due to the large amount of medical expenses needed to exceed this threshold, taxpayers do not often qualify for this deduction. When they do exceed the threshold, it usually results in only a small deduction. Therefore, in order for married taxpayers to benefit from electing to itemize deductions, they must have an additional $14,800 ($24,800 – $10,000) in deductible expenses compared to an additional $2,400 ($12,400 – $10,000) for a single taxpayer. If married taxpayers do not have sufficient medical expenses and mortgage interest, they will need a greater amount of charitable contributions. Recognizing this conundrum and not wanting to contribute a substantially greater sum to charities than they did before the TCJA, many married taxpayers succumb and claim the standard deduction. This results in failing to receive any tax benefit from charitable contributions made during the year.
By choosing not to itemize, married taxpayers are penalized when filing their state and local income tax returns also. In many state and local jurisdictions, in order to itemize on one’s income tax returns, one must have itemized on their federal return. Most states have significantly lower standard deductions in comparison to what most taxpayers can claim as itemized deductions, even after adding back their deduction for state and local income taxes. As a result, the marriage penalty at the federal level flows down to the state and local level and results in a marriage penalty there as well.
The SALT limit of $10,000 for married taxpayers is even more unfair in the light of married joint returns where both spouses have income subject to state and local income taxes, such as two-earner married couples. Even though some states offer a small reduction in taxable income for all two-income couples who file jointly (up to $1,200 in Maryland) in consideration of the marriage penalty, it is not substantial in mitigating the impact.
The marriage penalty has long been considered an unfair tax that results in a higher tax burden solely based on marital status. While the TCJA included some tax provisions that reduced the married tax penalty (as stated above), the $10,000 SALT limit increases tax on married taxpayers filing jointly. In the spirit of mitigating the marriage penalty, Congress could review the SALT limitation and consider raising it to $20,000 to make it more equitable for married taxpayers filing jointly.
Phillip Korb is an associate professor of accounting and the chair of the Department of Accounting, Finance and Economics in the Merrick School of Business. He is a licensed CPA and received his master’s degree in taxation from the University of Baltimore. He is also a former education member of the State of Maryland Board of Public Accountancy. Mr. Korb can be reached at firstname.lastname@example.org.
Jan Williams, Ph.D., is an associate professor of accounting in the Merrick School of Business. She is a licensed CPA and holds a M.S. in Taxation from the University of Baltimore. She currently serves as the education member on the State of Maryland Board of Public Accountancy and the Effective Learning Strategies Task Force chair on the Academic Executive Committee of the American Institute of CPAs. She is a past president of the Mid-Atlantic Region of the American Accounting Association. She may reached at email@example.com.