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The final tax bill retains the marriage penalty for the highest income earners—in a departure from earlier proposals from the House and Senate—while eliminating the penalty at lower income brackets.
“It’s clear that their original hope with this tax reform was to move toward a no-marriage-penalty zone,” said Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget. “They weren’t able to achieve that,” Goldwein said. Republican lawmakers did, however, “get rid of all marriage penalties except for couples making over $600,000 per year.”
To completely eliminate the marriage penalty, the GOP would have had to make the income thresholds at each marginal tax rate for married couples exactly double those of the thresholds for individuals.
In the final version of the tax legislation released Dec. 15 this is achieved at every income bracket, except the top one. The final agreement between the House and Senate sets the top individual tax rate at 37 percent for individuals earning $500,000 and above and joint filers earning at least $600,000. (For a road map of where to find key provisions in the final House-Senate tax reform bill, read Bloomberg Tax’s analysis.)
“At that income level, I think it’s very likely that most income is coming from one earner” in the married couple or from “investment income that isn’t attributable to either person’s work,” Goldwein said. This makes the case for getting rid of the marriage penalty at that level more difficult to argue, he said.
The original Senate version of the bill would have eliminated the marriage penalty entirely, while the original House version would have reduced today’s seven brackets to four, eliminating the marriage penalty at the highest and lowest income levels. All of the Republican proposals would generally reduce the marriage penalty as it exists under current law.
The reason behind the change in the final bill is “budget gymnastics,” said Caroline Bruckner, the managing director of the Kogod Tax Policy Center. “They had to raise revenue,” to pay for changes like lowering the top individual rate from 39.6 percent under current law to 37 percent, she said.
Lawmakers likely felt a lot of pressure to reduce the top rate to 37 percent because the tax legislation retains the Affordable Care Act’s 3.8 percent tax on net investment income that targets dividends and gains in excess of $250,000 for married couples filing jointly and $200,000 for single filers, Bruckner said. “Lots of high net worth folks have been complaining about that tax since it was enacted and its repeal was a big part of the ACA repeal debate” earlier this year, she said.
The final conference report didn’t retain many of the revenue raisers that were in the original House bill, so the conferees had to pull money from other places, Bruckner said.
The state and local tax deduction is another area in the final bill that has “marriage penalty” implications. Under the bill, taxpayers would be allowed to deduct up to $10,000 of state and local taxes paid—property taxes and either income taxes or sales taxes.
This cap is the same for married couples filing jointly and single filers—providing an advantage to individual taxpayers.
On the one hand, that makes sense, said Goldwein. For example, married couples probably have the same house so theoretically they wouldn’t need double the deduction for state and local property taxes, he said.
“But on the other hand, that basically means that if my wife and I were single and doing our taxes separately, we could each take $10,000 deduction for state and local taxes,” but “as soon as we get married that basically gets cut in half,” he said.
The SALT issue is reflective of the broader arguments for and against marriage penalties, Goldwein said.
Those in favor of eliminating the penalty would say that there shouldn’t be a large discrepancy between the way individuals and married couples are taxed, he said. Additionally, “you don’t want to discourage second earners from going to work,” he said. If one spouse makes $500,000, the second spouse may be discouraged from working for fear that the extra income will push the couple into the highest income bracket, he said.
On the other hand, those in favor of the penalty would argue that “couples function as generally a single economic unit,” he said. “And they’re definitely able to consolidate costs in a way that two individuals are not.”
Brian Riedl, a senior fellow in budget, tax, and economics at the conservative-leaning Manhattan Institute for Policy Research, said he doesn’t anticipate that retention of the marriage penalty for high-income earners will be a huge policy concern for Republicans in the future.
“I think lawmakers will probably have higher priorities in tax policy,” he said. For example, Republicans may want to fully eliminate the estate tax and individual alternative minimum tax, which were both retained in some form in the final bill, he said.
They may also be focused on trying to make the individual tax changes, which mostly expire in 2026, permanent, Riedl said.
Additionally, lawmakers on both sides of the aisle have long talked about expanding the earned income tax credit for childless adults, he said. “Those will be some of the bigger priorities.”
Goldwein said he hopes that, if the marriage penalty debate resurfaces down the line, lawmakers decide to bring the tax benefit down for individuals, rather than up for couples.
“It seems like anytime there’s any kind of inequity in the tax code or in any kind of spending program, we always solve it by spending more money and cutting more taxes,” he said. “We always take a loser and make them better, not realizing that that creates new losers because we’re adding to the debt and someone has to pay for it.”
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