taxes

Overcoming the marriage penalty at tax time

George SaenzQuestionDear Tax Talk,
My wife and I were married in August 2010. I have been reading that we may want to adjust our W-4 allowances in order to avoid paying money back at tax time. We would like to maximize the amount we get back from income taxes, because we plan to use some of this money toward a down payment on a house together. What is your recommendation? Any help would be greatly appreciated.
-- Alex

AnswerDear Alex,
While on the one hand you're getting together with the love of your life, on the other the tax code is preparing to separate you from your money.

There are basically two filing statuses: married or unmarried. When much of today's tax code was written, married couples were intended to be given a break by lowering their tax rates and increasing their deductions. However, this was back in the day when one spouse didn't work or made a fraction of the other spouse's income. With the evolution of equal pay, the tax advantages of marriage declined. The reason is that the tax rates are progressive: The higher an individual's income, the higher their tax rate.

If you look at the 2010 tax rates, the break point for a married couple is double that of an unmarried taxpayer up to $137,300. Two unmarried taxpayers netting $82,400, the maximum taxable income before the next higher rate, will pay less tax combined than a married couple each making the same.

Part of the penalty is negated by the economies of marriage. A married couple's housing and food costs are not the same as two unmarried taxpayers living apart. In other words, a slightly bigger home that a married couple may occupy does not cost the same to occupy (including utilities) as two individual homes for unmarried taxpayers. Of course, a cohabitating couple without the tax disadvantage of marriage would enjoy the same economies.

All that said, it's too late in the year to change your W-4 at work to increase your federal income tax to overcome the marriage penalty in 2010. For 2011, you may want to complete new W-4 forms. In figuring withholding allowances, complete the two-earner section of the W-4 to determine any increased withholding.

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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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