Wedlock Is Taxing:
I do . . . till dual-salary federal tax-code disparities do us punish

From: New York Now | Money |
Sunday, October 11, 1998
http://www.mostnewyork.com/1998-10-10/New_York_Now/Money/a-7494.asp?last6days=1
By KATHY M. KRISTOF
Special to The News

Judy and Sean O'Connor understand only too well why married people complain
that the federal tax code is unfair.

The young Los Angeles couple both work in the entertainment industry, pulling
down nearly identical salaries. Until they wed in 1996, both received tax
refunds each year. Now their combined tax bill has jumped by thousands of
dollars, wiping out the money they had saved for a down payment on a home.

In tax parlance, the O'Connors are victims of the "marriage penalty." This is
the all-too-common phenomenon that causes millions of married couples to pay
dramatically more federal income tax than similarly situated singles.

However, until Tuesday, it looked like the O'Connors were going to get some
relief. In a 230-page tax bill recently passed by the House of
Representatives, legislators proposed to cut the marriage penalty by boosting
the standard deduction available to married couples. That would have provided
at least some tax relief to some 48 million Americans. But the tax bill " and
the first serious effort to address federal tax penalties for married couples
" was killed in the Senate on Tuesday.

What did the bill do? It simply proposed that married couples get twice as
large a standard deduction as single filers. For the O'Connors, the measure
would have spelled $400 in annual savings.

Yet, it is important to note that not all married couples would have been
helped had the measure passed.

For example, the proposed law wouldn't have helped Paul and Laura Coble at
all. Why? The couple from Whittier, Calif., has substantial itemized
deductions " taxpayers choose between claiming either the standard deduction
or itemized deductions " and the Taxpayer Relief Act of 1998 did nothing to
address the other 56 areas in the tax code that penalize people like the
Cobles simply for being married.

Indeed, while the now-defeated proposal attempted a simple solution, it
underscored the complexity of fixing this long-standing but increasingly
controversial problem. The sponsor of the tax proposal, Rep. Bill Archer (R-
Tex.), acknowledged that his measure would have helped only about half the
nation's 49 million married taxpayers.

A Complete Makeover

Why so little so late? Because to completely fix the marriage penalty, the
voluminous federal tax code would have to be scrapped.

"The marriage penalty is a reflection of the progressive income tax system
itself," says Ari Fleischer, a spokesman for the House Ways and Means
Committee that Archer chairs. "A progressive income tax system, by its very
nature, cannot be marriage-neutral."

But the really difficult issue is not the constant tug between marrieds and
singles " it's the fact that not all married couples are taxed alike. Indeed,
some couples " mainly dual-income families where the man and woman earn
similar incomes " suffer a marriage penalty, while others actually get a
bonus.

Who gets the bonus? Couples with just one income and those with highly
disparate salaries, according to the Internal Revenue Service.

In fact, whenever lawmakers try to eliminate the marriage penalty, they end up
inadvertently creating a bigger marriage bonus for one-worker families.

Watch the Deduction

Exactly which provisions in the tax code create this penalty or bonus?

First, there's the standard deduction. In 1999, Congress projects that single
people who don't itemize deductions will get a $4,300 deduction. That amount
is subtracted from your income before computing your tax. Meanwhile, under
current law, married couples would be able to subtract just $7,200 " $1,400
less than if this couple remained single and each took a $4,300 standard
deduction, or $8,600 combined. If both spouses work, the current disparity
causes couples to pay more tax than similarly situated singles.

However, because the married deduction is bigger than the single deduction,
single-income couples get a bonus over similarly situated singles.

There also are literally dozens of so-called "phaseouts," which limit itemized
deductions, personal-exemption credits, adoption tax credits, and eligibility
to contribute to tax-sheltered accounts, such as Roth IRAs, that are also
contingent on income. Because the income that triggers a tax-break phaseout is
seldom twice the amount for marrieds as it is for singles, dual-income couples
with similar incomes get hit time and again.

Suddenly, A New Bracket

Then there are those progressive tax rates. Earn $30,000 as a single person
and, after taking your standard deduction and a personal-exemption credit, and
you're in the 15% federal bracket. But put together two $30,000 earners and
suddenly a portion of their income is taxed at 28%.

"We have a good marriage but, I'll tell you, this makes you want to get a
divorce," says Newell Canfield, a counselor with the Los Angeles Unified
School District.

Canfield won't divorce for tax reasons. However, he says some friends of the
couple have "separated" " establishing different mailing addresses, even
though they live together and remain married " so they can file their taxes as
singles. That saves these couples a small fortune in income.

Ultimately, Archer " and a handful of other tax reformers " would like to
replace the current progressive income tax system with a flat tax that would
be levied on everyone equally and would eliminate marriage penalties and bonuses.

But flat-tax proposals are controversial because they could significantly
boost the tax hit on the poor, while dramatically lowering taxes for the wealthy.

In the meantime, couples like the O'Connors watch and wait, hoping that
Congress eventually will make good on its promise to at least modestly lift
the tax burden on married couples. Until then, the O'Connors " and millions of
couples like them " will have to choose between marriage and money.


Original Publication Date: 10/11/1998