What Is the Marriage Tax Penalty?

The marriage tax penalty has basically been suspended since 2001, but barring action from Congress, the penalty is set to return starting in 2011. This doesn't mean you and your spouse will automatically be paying a higher tax rate. Here's what you need to know about the marriage tax penalty.

What the Penalty is

The marriage tax penalty requires some married couples filing jointly to end up paying more in taxes than 2 individuals filing singly. The incomes of the spouses are averaged to come up with the penalty rate they'll pay. The biggest financial impact is on couples where each spouse makes roughly the same amount of money. Couples in which one spouse makes a lot more money than the other, such a situation where the husband works and the wife stays at home, are less likely to have to pay a penalty.

By way of an example, let's look at a household with an annual income of $100,000. If each spouse makes $50,000, the couple will pay a higher tax rate (by way of a lower standard deductible). If one spouse makes $75,000 and the other makes $25,000, they'll pay a lower combined tax rate compared to two individuals filing separately. Being married and filing separately will not make a difference.

If the marriage tax penalty does return in 2011, some married couples will in fact be paying a higher tax rate than 2 individuals making the same amount of money, but filing singly.