The House Democrats’ tax package presented this week would increase the so-called marriage penalty for wealthy couples.
Couples filing a joint tax return face a marriage penalty if their income tax bill is higher than what they would file as a single taxpayer.
A penalty is more common when each spouse has similar income, according to the Tax Policy Center. There are penalties in current regulations, although the 2017 Republican Tax Act reduced its scope.
House legislation – which levies approximately $ 2.1 trillion in taxes from the corporate and rich over a decade to fund US safety net expansions and other measures – increases the existing penalty.
The proposal would raise the top tax rate from 37% to 39.6%. A single applicant with an income greater than $ 400,000 in 2022 would pay this rate. However, the $ 450,000 income limit for married couples filing a joint statement is not much higher. (It would have to be double that, or $ 800,000, to avoid a marital penalty in this regard.)
(Currently, a single parent earning more than $ 523,600 pays the highest rate, compared to $ 628,300 for married couples.)
“There is clearly a higher marriage penalty,” said Leon LaBrecque, accountant and certified financial planner with Sequoia Financial Group, of the House of Representatives legislation.
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The impact of the penalty would go beyond the payroll tax. A new top 25% tax rate on investment income (from valued stocks and dividends) would also come in at $ 400,000 (single) and $ 450,000 (married) in 2022.
“They are not everyday Americans [who’d be affected by the change]“, Said Paul Auslander, CFP and Director of Financial Planning at ProVise Management Group, about the income range. “It’s pretty high.”
Depending on the couple, the change could add up to several thousand dollars in additional taxes per year, he said.
“This is not change,” he said. “It won’t break anyone, but it’s a nuisance.”
As lawmakers continue to debate the contours of the comprehensive package, which can cost up to $ 3.5 trillion, several revisions can come.
Partly, the success of the legislation is not guaranteed because of the razor-thin margins of the Democrats in the House and Senate and the competing visions of how the richest Americans should be taxed.
The Democrats in the House of Representatives likely set up the income bands for married couples in an effort to raise more money for their agenda, Fremder said. A reduction or abolition of the marriage penalty would mean less tax revenue.
According to the Joint Committee on Taxation, the impartial tax advisor to Congress, the proposed top tax rate and income bands would raise $ 170.5 billion over a decade.
If the marriage sentence remains intact during the legislative process, high-income couples can change their financial plans.
For example, couples might consider filing separate tax returns or even staying single, LaBrecque said.
According to the Tax Policy Center, filing a separate tax return often leads to a higher tax liability under applicable law.
House legislation, however, may not make this avenue a money saver for many people – couples filing separate declarations would top 39.6% after earning $ 250,000.