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Are You Paying a Marriage Penalty Tax?

The “marriage penalty” a term long forgotten after Clinton changed the Federal tax code. But it is still around if you live in one of these states.

What is the Marriage Penalty, well under a graduated-rate income tax system, a taxpayer’s marginal income is subject to progressively higher tax rates. A penalty exists when a state’s income tax due for married taxpayers filing jointly is more than double the tax due if each filed as single.

This non-neutral tax treatment is particularly harmful to owners of pass-through business like S-corporation and Partnerships, whose business income is taxed under individual income tax system. Subsequently, under a marriage penalty, married business owners are subject to higher effective tax rates on their business income than they would be otherwise.

15 states, highlighted in pink in the map above, have a marriage penalty built into their bracket structure.

7 states, Arkansas, Delaware, Iowa, Mississippi, Missouri, Montana, and West Virginia, as well as the District of Columbia, all have an offset of their marriage penalty in the bracket structure by allowing married taxpayers to file separately on the same return, avoiding loss of credits and exemptions.

10 states have a graduated-rate income tax but double their brackets to avoid a marriage penalty: Alabama, Arizona, Connecticut, Hawaii, Idaho, Kansas, Louisiana, Maine, Nebraska, and Oregon.

The ability to file separately on the same return helps tax prepares and individuals in 7 states that allow this filing and so is the ability to do so even if the couple files jointly for federal purposes. Filing separately on the same return eliminates this problem, but is slightly more complex for joint filers. While married couples have the option of filing separately, unfortunately, some states only allow this if it is also done on their federal forms. It either disallows or reduces the federal deductions and credits available to the family jointly, which is also a form of marriage penalty.

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