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Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.

• CCH Tax Briefing: 2012 Federal Budget Proposals
• CCH Tax Briefing: 2010 Tax Year-in-Review
• CCH Tax Briefing: 2010 Tax Relief/Job Creation Act
• CCH Tax Briefing: Sunsetting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001
• CCH Tax Briefing: Small Business Jobs Act of 2010 (H.R. 5297)
• CCH Tax Briefing: Education/Jobs/Medicaid Assistance Act of 2010
• CCH Tax Briefing: Homebuyer Assistance and Improvement Act of 2010
• CCH Tax Briefing: Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010
• CCH Tax Briefing: Health Care Reform Act
• CCH Tax Briefing: 2010 Hiring Incentives to Restore Employment Act

CCH Reviews What Single and Joint Income Tax Filers Can Expect

(RIVERWOODS, ILL., January 2011) – The path you take in determining whether you’re getting an income tax return or paying more to the IRS usually starts with the top-of-the-form question: Single or Married? CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com), breaks down potential scenarios for single, married and domestic partner filing statuses for the 2011 tax season.

“For tax rewards as well as penalties, those who are married, single or living together are treated differently under the tax law,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “Furthermore, the tax implications of different marital decisions aren’t always clear.” According to Luscombe, more than 60 provisions of the Internal Revenue Code specifically apply to married couples and can either help or harm these taxpayers.

Marriage Penalty Relief, Child Tax Credit and More

As Congress debated tax-cut extensions through the final days of 2010, some past provisions aimed at mitigating what’s known as the “marriage penalty” were kept in place. Along with extending the individual rate cuts for two years, the 2010 Tax Relief Act extends marriage penalty relief that was linked to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the standard deduction and the earned income tax credit. The child tax credit remains at $1,000 for the 2011 and 2012 tax years. The 2010 Tax Relief Act also extends some enhancements to the adoption credit and the dependent care credit for two years.

At one time, there were two obvious sources of the marriage penalty. First, the standard deduction allowed on a joint return was less than twice the amount of the standard deduction for single filers. Second, a couple could move into a higher tax bracket when their incomes were combined on their joint return. Add together two incomes that each might be taxed at 15 percent and you could get a joint income taxed at 28 percent.

The standard deduction for joint filers has been raised to double that of singles, and the 10- and 15-percent tax brackets are now twice as high for joint filers, as well. But beyond the 15-percent bracket, the classic “marriage penalty” lingers on.

For example, Lisa and Larry each have a taxable income of $75,000, toward the top of the 25-percent bracket for single filers. As domestic partners who file singly, each pays income tax of $14,538 after the “Making Work Pay” credit. If they tied the knot and the tax laws were marriage-neutral, their tax would be twice that amount, or $29,078. But that’s not how things work.

Filing jointly, Lisa and Larry report taxable income of $150,000. The 25-percent tax bracket for joint filers ends at $137,300, so the top $12,700 of their joint income is taxed at 28 percent, leading to a total tax bill of $29,443.50 – a “marriage penalty” of $355.50.

Distribution Determines Penalty…or Bonus

It’s important to note that it’s the distribution of income – 50/50 between the two spouses – that produces the penalty. If Lisa were a single professional with a taxable income of $150,000, she would not be eligible for the Making Work Pay credit and would owe $35,709.25. So she would reduce her income tax and reap a “marriage bonus” of $6,265.75 if she were to marry a charming but penniless drifter.

“When the income tax was first established, the typical family included only one wage-earner,” Luscombe said. “As a result, some people, especially those in ‘traditional’ families with a principal wage-earner, benefit from the same structures in the tax code that penalize others, such as those in dual-income situations.”

Impact of Earned Income Tax Credit

There is a special and ironic marriage penalty that can hit hard at the low end of the income scale. Two unmarried wage-earners who each have children and are just making it with the help of the earned income tax credit (EITC) – a refundable credit and a tax provision encouraging work over welfare – often face a tax dilemma after “tying the knot.”

For example, Kim and Doug each earn $25,000 and the couple lives apart. Each has one child and can file as head of household, which will entitle each to an $8,400 standard deduction for 2010 taxes. Unmarried, each is entitled to a 2010 EITC of $1,680. Combined with the $1,000 child credit each is entitled to, this eliminates their federal income tax obligations and even produces a payment to each one from the Treasury of nearly $2,000. If they had filled out the proper employment tax forms, they could have received that refundable credit throughout the year in their paychecks.

If these two low-wage workers decide to get married, they’ll receive a higher standard deduction as joint filers rather than heads of households. However, at $11,400, it’s nowhere near double the amount (2 x $8,400) they were each entitled to as single parents. Worse, with $50,000 in wages, the couple no longer qualifies for the EITC.

The bottom line is that the couple receives a refundable credit of only $34, and without the Making Work Pay credit, they would owe several hundred dollars in taxes, losing out financially as a result of getting married.

Favorable Tax Advantages for Married Couples

There are many tax benefits for married couples filing joint income tax returns that don’t always make financial headlines. For example, a spouse is automatically a “dependent” in the eyes of the law, even in a marriage in which husband and wife have identical incomes. Under federal law, this makes group health coverage for the spouse a tax-free benefit when it’s provided by an employer. And in the case where a spouse’s $50,000 hospital bill is paid by an insurance plan, that’s tax-free as well.

By contrast, it’s more difficult for an adult partner to qualify as a dependent in the eyes of the IRS, so even when unmarried couples are granted “domestic partner” benefits by companies, the benefits they are given are diminished through taxes. Since the signing of the federal Defense of Marriage Act in 1996, marriages between people of the same sex, where they are allowed by state law, have no effect for federal tax purposes.

For example, a group health policy for a domestic partner or same-sex spouse that is subsidized by an employer to the tune of $4,000 a year is treated as an additional $4,000 of taxable income for the employee.

“Most people would say that it’s better to have to pay federal income tax on the extra $4,000 than not to have the coverage,” Luscombe noted. “Still, this is a tax hit that would never apply to a traditional married couple with employer-provided health insurance.”

Traditional spouses also are favored when it comes to pensions and inheritances, Luscombe observed.

“The surviving spouse in a two-sex marriage can inherit a husband’s or wife’s estate without any federal estate tax. That’s not the case for any other relationship,” Luscombe said.

More Math for Same-sex Married Couples

Although federal law does not recognize marriages or civil unions between same-sex couples, a number of states do. Those couples then have to figure their taxes twice, using different statuses for their federal and state filings.

For their federal return, each individual must use the “single” or possibly “head of household” status. On their state return, the couple can file jointly or as “married filing separately.” As a practical matter, this usually means computing a second federal return that won’t be filed but with the correct state filing status, then transferring amounts from that second return to the state return.

“From a tax point of view, marriage has always been a little more complicated than it looks,” Luscombe said. “This latest wrinkle just confirms that.”

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).

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