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Multiple articles online alludes to this tax penalty, claiming that dual income couple "can, often, may" suffer from it without giving any concrete sense of the magnitude.

Could we do an illustrative numerical example to figure this out?

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Consider this scenario with random but not entirely unreasonable numbers:

- Spouse A: AGI=$200K
- Spouse B: AGI=$200K
- Mortgage (both on deed and note): $2M
- Interest: $80K/year

Let's do the math for married couple A+B who just bought a $2M property (a 3-bedroom house in Mountain View, CA, say). Not unreasonable, I know people in exactly this situation.

- Total AGI: $400K
- Interest deduction: $40K
- Taxable income: $360K
- Total tax: ~$95K

Now for singles' scenario:

- Total AGI: $200K
- Interest deduction: $40K
- Taxable income: $160K
- Total tax: ~$36K

So if A and B each file as single, they'll pay total of $72K taxes, but as a married couple they have to pay $96K - $24K difference (>30%), which is that penalty you've heard so much about.


Explanation:

Interest expense - is limited to $1M of mortgage, but per tax return, not per property. So if two people buy equal shares of a $2M property - they can only deduct interest on the first million if they're married, but split both millions between them if they're single.

Tax rates - the marginal rates for married filing jointly are not exactly double as for single, much less. Thus if you file as single you get much more money into the lower brackets.

AMT - Same as the brackets, the AMT exemption for married couples is not exactly double the exemption for single. So married couples who are high earners with no kids, especially if they own property or pay income taxes in States like California or New York, are much more likely to get hit by AMT.

More exemption phase-out amounts for MFJ are less than double for singles, some more taxes kick in for MFJ in less than double of what they kick in for singles, etc etc.

From tax perspective, for two persons with comparable incomes (or with both working and at least one high earner) being married is a horrible idea.

Unless you're rich enough for estate taxes to matter, if so - then it is worth it.

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  • It seems like there should be a tool for couples to input their income and asset to figure out beforehand how much is their tax bonus and penalty after marriage. Are you aware of such a thing?
    – Heisenberg
    Jan 28 '16 at 7:39
  • @Heisenberg rule of thumb is that for low-income family or single earner MFJ is beneficial, for high earners (~100K and up each) the penalty becomes significant. Less children and more deductions and earnings - the higher the penalty (because of lower phase outs and AMT exemptions).
    – littleadv
    Jan 28 '16 at 8:41
  • Roughly speaking, itemized deductions are reduced by 3% of the amount by which the AGI exceeds $309,900 for MFJ returns and $258,250 on single returns. Thus, the single returns get to deduct $40K each whereas the MFJ return mortgage deduction of $40K is further reduced by about $2.7K? Jan 28 '16 at 16:03
  • @DilipSarwate There are a whole bunch of phase-outs like that, I didn't want to write a book on the matter in this answer...
    – littleadv
    Jan 29 '16 at 5:59
  • I agree that you don't want to write a whole book. The reduction in itemized deductions is the one thing of "More exemption phase-out amounts for MFJ are less than double for singles, some more taxes kick in for MFJ in less than double of what they kick in for singles, etc etc." that applies to the very simplified scenario (mortgage interest is the only item on Schedule A, no investment income, etc) that you have set up, and adds further fuel to your assessment that "From tax perspective, ..., being married is a horrible idea." Jan 29 '16 at 14:16

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