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.
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.