Tax Administration: Income Tax Treatment of Married and Single
Individuals (Letter Report, 09/03/96, GAO/GGD-96-175).
Pursuant to a congressional request, GAO provided information on certain
income tax code provisions that result in marriage penalties or marriage
bonuses, focusing on: (1) those income tax provisions that depend on
taxpayers' marital status for their applicability; and (2) the number of
taxpayers affected by marriage penalties or bonuses.
GAO found that: (1) there are 59 provisions in the income tax code where
tax liability depends at least partially on the taxpayer's marital
status; (2) the provisions on the tax rate, the standard deduction, and
the earned income credit are most commonly discussed in connection with
marriage penalties and bonuses; (3) nine provisions, such as those on
the tax rate and social security taxation, make some adjustment for the
differences between joint and single income, but adjustments for married
couples filing jointly are less than twice those allowed to single
taxpayers; (4) those tax provisions limiting capital losses and the home
mortgage interest deduction have only one limitation that applies
equally to married and single taxpayers; (5) nine other provisions, such
as those on the personal exemption, treat married couples as if they are
single individuals or provide couples with twice the benefit allowed a
single person; (6) 26 provisions treat a married couple as a unique,
indivisible unit for tax purposes; (7) 56 of the 59 tax provisions could
result in a marriage penalty or bonus depending on the taxpayer's
individual circumstances; (8) the single most important factor that
determines the provisions' effect on married couples is how income is
divided between spouses; (9) couples with disparate incomes generally
could enjoy a marriage bonus, while couples with equivalent incomes
generally incur a marriage penalty; (10) other factors affecting
couples' tax liability include which spouse owns property, has capital
gains or losses, and is qualified for tax deductions and credits; and
(11) the impact of marriage penalties and bonuses varies widely, both in
terms of the number of taxpayers affected and the dollar amounts
involved, but existing data is insufficient to quantify these numbers.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-175
TITLE: Tax Administration: Income Tax Treatment of Married and
Single Individuals
DATE: 09/03/96
SUBJECT: Personal income taxes
Taxpayers
Tax administration
Tax law
Tax credit
Fines (penalties)
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Cover
================================================================ COVER
Report to the Honorable
Orrin G. Hatch, U.S. Senate
September 1996
TAX ADMINISTRATION - INCOME TAX
TREATMENT OF MARRIED AND SINGLE
INDIVIDUALS
GAO/GGD-96-175
Tax Treatment of Married Individuals
(268730)
Abbreviations
=============================================================== ABBREV
AGI - adjusted gross income
IRA - individual retirement account
IRC - Internal Revenue Code
IRS - Internal Revenue Service
Letter
=============================================================== LETTER
B-272101
September 3, 1996
The Honorable Orrin G. Hatch
United States Senate
Dear Senator Hatch:
This report responds to your request for information on income tax
provisions in the Internal Revenue Code (IRC) that potentially create
"marriage penalties" or "marriage bonuses" with respect to the tax
liability of married couples. As defined herein, a marriage penalty
results when two married individuals have a greater tax liability
than two similarly situated single individuals, i.e., individuals
with the same total income. Conversely, a marriage bonus results
when a married couple owes less taxes than two similarly situated
single individuals. This report (1) summarizes the current income
tax provisions in the IRC whose applicability depends upon whether a
taxpayer is married or single, (2) identifies those provisions likely
to result in marriage penalties or marriage bonuses or both, and (3)
discusses the feasibility of quantifying the numbers of taxpayers
affected by the marriage penalties and bonuses.
BACKGROUND
------------------------------------------------------------ Letter :1
Current federal income tax law divides individual taxpayers into two
major groups--those who are married and those who are single.
Married people can file jointly with their spouse or can elect to
file separately ("married filing separately"). Single people file
either as an unmarried taxpayer or as an unmarried taxpayer
maintaining a household with dependents ("head of household"). A
married person may file as a single person only under limited
circumstances.\1 For the most part, married taxpayers file jointly
with their spouse.\2
Traditionally, the tax treatment of married and single taxpayers has
involved trade-offs among three basic principles: (1) there should
be progressive tax rates, with successively higher income brackets
taxed at increasingly higher rates; (2) families with equal income
should have equal tax burdens, notwithstanding how the income is
divided between spouses; and (3) individual tax liability should not
change when people marry (the tax system should be "marriage
neutral"). The trade-offs among these principles exist because, as
public finance experts have long recognized, a tax system cannot
satisfy all three principles simultaneously.
An example of the trade-offs is our current tax system, which has
progressive tax rates and taxes married couples with the same income
equally. However, this can result in the income of some married
couples falling into different tax brackets than would be the case if
they were to file as single individuals. Therefore, the present tax
system is not "marriage neutral" and two married people may not have
the same tax liability as two similarly situated single people.
Generally, large income differences between spouses can lead to
marriage bonuses while roughly equal incomes can lead to marriage
penalties.
The equity of the comparative treatment of married and single people
under the income tax laws has been the subject of debate for nearly
the past 50 years. In 1948, Congress permitted married couples to
split their income between spouses if they reported the income on a
joint return. For most married couples at the time, this change led
to lower tax liability.\3 Since that time, most married people have
elected to file jointly, while most unmarried people file as single
individuals.
In general, the debate over the most equitable way to deal with
married and single taxpayers has focused on the tax rate structure.
Beginning in 1948, the rate schedules were structured so that the tax
liability for married taxpayers was never more than--and could be up
to 42 percent less than--that of similarly situated single people.
To correct the apparent inequity in the tax rate for single people,
Congress enacted a separate rate schedule for single taxpayers in
1969, providing that the tax liability for a middle- income single
person could be no more than 20 percent greater than that for a
married couple with the same total income. This rate change,
however, created a new "marriage penalty" for certain married couples
if both spouses earned approximately the same income.\4
Notwithstanding the focus on the rate structure, many other
provisions of the income tax code take into account the fact that one
large group of people reports jointly as a household, while the other
large group reports as single earners.\5 This adds complexity to the
income tax code, and the continuing possibility of tax breaks for
some, under certain circumstances, and tax penalties for others,
under different circumstances. Over the years, various proposals
have been made for dealing with these inequities. We summarize the
major proposals in appendix VI of this report.
--------------------
\1 A married taxpayer can file as a single taxpayer or as a head of
household if he or she is legally separated under a decree of divorce
or separate maintenance, or if he or she qualifies as an "abandoned
spouse" under IRC section 7703(b). To be considered an abandoned
spouse, the taxpayer must have maintained a household for a dependent
child, provided over 50 percent of the household expenses for the tax
year, and lived apart from his or her spouse for the last 6 months of
the tax year.
\2 In 1992, about 95 percent of all married taxpayers filed jointly.
At present, the income tax rates are structured to discourage married
taxpayers from electing to file separate returns. Under current law,
such an election would lead to higher taxes in most cases.
\3 The change came about after inequities arose between married
taxpayers in "community property" states and those in "common law"
states. Because community property states required spouses to split
income between one another, typically the tax liability for taxpayers
in these states was less than that of taxpayers in common law states.
By allowing all married couples to split their income when reporting
jointly, the differences in federal tax liability were effectively
eliminated.
\4 With the new rate schedule, married taxpayers were not allowed to
file as single individuals. If, therefore, two married people with
roughly equivalent incomes were bumped up into a higher tax bracket
than either would be in had each filed individually, the new law
provided no relief.
\5 In 1992, 42 percent of taxpayers filed jointly with their spouse,
while 43 percent of taxpayers filed as single individuals.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
We identified 59 provisions in the income tax code where tax
liability depends, at least in part, on whether a taxpayer is married
or single. These provisions include three IRC sections most commonly
discussed in connection with marriage penalties and bonuses: the
sections on the tax rate, the standard deduction, and the earned
income credit. The remaining 56 provisions are less frequently
discussed and include many different types of tax law provisions,
such as those dealing with taxation of social security benefits,
limitations on capital losses, and the home mortgage interest
deduction.
When enacting these varied provisions, Congress has dealt with the
equities between income reported jointly by most married couples and
the single income reported by most single people in different ways,
which we categorize into four groups. One of these groups
encompasses nine provisions, such as those on the tax rate and social
security taxation, for which Congress has created different sets of
requirements for married and single people, making some adjustment
for the differences between joint and single income. For a second
group encompassing 15 other provisions, such as those limiting
capital losses and the home mortgage interest deduction, the laws
include only 1 limit for both married and single taxpayers. For a
third group of nine provisions, like that allowing a personal
exemption, Congress has treated married couples as if they were
single individuals, or provided them with twice the benefit allowed a
single person. A fourth group consists of 26 provisions under which
married people are considered a unique unit for the purpose of the
tax code section.
The different ways that married and single people are treated under
the income tax code could lead to situations where the tax liability
of married taxpayers is not the same as that of two similarly
situated single taxpayers. As defined in this report, these
situations may result in either a marriage penalty (married couple
owes more tax) or a marriage bonus (married couple owes less tax).\6
All but 3 of the 59 income tax provisions we identified could result
in a marriage penalty or a marriage bonus, depending on the
individual circumstances of the taxpayer.
The marriage penalties and bonuses associated with the various
provisions discussed in this report follow several patterns, but all
hinge upon the individual circumstances of the married couple. The
single most important factor in these situations is how income is
divided between spouses. Generally, disparate income between spouses
could lead to marriage bonuses, while equivalent income could result
in marriage penalties. Thus, where one spouse has a high income and
the other spouse has little or no income, tax rates for the married
couple filing jointly would be lower than had each spouse filed
individually--a marriage bonus. If, though, both spouses earn
roughly the same income, their combined income may increase their tax
rate beyond what either would have had as a single filer--a marriage
penalty.
Marriage penalties and bonuses related to many provisions, though,
are tied to other individual factors, such as which spouse owns
property and which spouse is qualified for tax deductions and
credits, in addition to the split of income between husband and wife.
For example, current law limits deduction of capital losses from
ordinary income to $3,000 for either a married couple or a single
taxpayer. If husband and wife have capital losses of $3,000 each,
the law leads to a marriage penalty--the couple would be able to
deduct $6,000 as single taxpayers instead of $3,000 filing jointly.
On the other hand, if one spouse has $8,000 in capital losses and the
other has $8,000 in capital gains, the capital loss completely
offsets the capital gain, leading to a marriage bonus.
The impact on taxpayers of marriage penalties and bonuses is widely
varied, both in terms of the numbers of taxpayers potentially
affected by the provisions and in terms of the dollar amounts
involved in the tax liability. To assess the comparative importance
of these many different provisions, we attempted to quantify the
number of taxpayers potentially subject to the specific marriage
penalties and bonuses. However, when we examined the information
available, we determined the current data insufficient to make such
an assessment.
--------------------
\6 Public finance experts have long recognized alternative views in
determining when tax schedules are "neutral" with respect to
marriage. As one example, if two can live together cheaper than two
people alone, then a couple living together may be viewed as having a
greater ability to pay taxes than two people living alone with the
same combined income. According to this view, therefore, imposing
the same tax burden on a married couple as on two single individuals
living apart results in a marriage subsidy or bonus.
ANALYSIS OF THE INCOME TAX
TREATMENT OF MARRIED AND SINGLE
TAXPAYERS
------------------------------------------------------------ Letter :3
In the first 4 appendixes to this report, we discuss the 59 income
tax provisions we have identified. The four appendixes group the
provisions according to the general tax treatment of married and
single taxpayers, and each appendix lists various provisions,
describing how each provision operates, how it affects married
taxpayers, and what potential marriage penalties and bonuses may
arise through the operation of the provision.
Appendix I describes nine income tax provisions, including two--on
the tax rates and the standard deduction--which potentially affect
most taxpayers. These nine provisions adjust the income levels and
deduction amounts to account for joint and single income. However,
the adjustments for married couples filing jointly are less than
twice those allowed to a single person. Thus, the tax rate for
single people in tax year 1995 was 28 percent for taxable income over
$23,350, while married people are taxed at a rate of 28 percent when
taxable income exceeds $39,000--less than twice the income level of
the single taxpayer.
Generally, all these provisions potentially could lead to either a
marriage penalty or a marriage bonus, depending on the relative
income of the two spouses. With the tax rates, for example, there
would be a marriage penalty if each spouse earns $21,000--their joint
taxable income of $42,000 would be taxed at a marginal rate of 28
percent, even though if each filed as single individuals their
highest tax rate would be 15 percent. On the other hand, there would
be a marriage bonus if one spouse earns $34,000 and the other spouse
earns $2,000--the married couple would be taxed at a rate of 15
percent although the spouse with $34,000 in taxable income would have
a marginal tax rate of 28 percent filing as an individual.
Appendix II shows 15 income tax provisions that provide the same
income or deduction level, whether the taxpayer is filing jointly as
a married couple or as a single individual. For instance, the home
mortgage interest deduction is limited to the interest on a mortgage
balance not exceeding $1 million; this limit is the same for a
married couple as for a single person.
Overall, the tax treatment of married and single people in these
provisions leads to a mixed impact on married taxpayers. These
provisions produce both penalties and bonuses, depending on the
individual circumstances. With the home mortgage interest deduction,
for example, two married taxpayers may both own houses with mortgages
of $600,000 each, for a combined mortgage of $1.2 million--over the
$1 million limit. As a married couple, the taxpayers would not be
able to deduct interest attributable to the mortgage amount over $1
million. As single taxpayers, though, each could deduct the interest
on the two individual mortgages. However, suppose that one of the
married taxpayers owns a home with a mortgage balance but has little
or no income; in this case, the mortgage interest could be used to
offset the other spouse's income, a tax advantage unavailable to two
unmarried taxpayers.
Appendix III examines nine provisions that provide full adjustment
for joint and single income, either by treating married taxpayers as
single taxpayers or allowing them twice the tax benefit allowed a
single person. Thus, married taxpayers are each allowed to deduct
the same personal exemption as a single person--$2,500 per spouse.
For the most part, these provisions could only result in a tax bonus
to the married couple. For example, even though one spouse has
little or no income, a married couple would be eligible for two
personal exemptions of $2,500, and both exemptions could be used to
offset the income of the other spouse.
Appendix IV describes 26 income tax provisions that treat married
couples as a unique unit in the case of certain special situations
between husband and wife. In one such provision, the law provides
that a husband (or wife) cannot deduct losses on a sale of property
to a spouse because they are considered "related parties."
Technically, many of these provisions could create tax penalties for
married couples. For instance, where the loss on the sale of
property between two spouses is nondeductible, such a loss would be
deductible in a sale involving an unmarried couple. On the other
hand, some provisions, such as IRC section 7872 on below-market
loans, free married people of the tax consequences of financial
dealings between spouses.
INSUFFICIENT DATA AVAILABLE TO
MEASURE THE COMPARATIVE
SIGNIFICANCE OF THE DIFFERENT
TAX PENALTIES AND BONUSES CITED
IN THIS REPORT
------------------------------------------------------------ Letter :4
We found that tax data, as currently reported by taxpayers and
compiled by the Internal Revenue Service (IRS), did not contain data
elements that would permit the identification of the numbers of
people potentially affected by all the marriage penalties and bonuses
described in this report. Such data would be necessary, for example,
to rank the comparative significance of the individual provisions.
Assessment of the numbers of taxpayers potentially affected by these
penalties and bonuses would require identification of the married
taxpayers whose individual tax situations include a marriage penalty
or bonus. Information on numerous individual factors, the most
important of which is division of income between spouses, would be
critical to attribution of a specific penalty or bonus to a married
couple.
Current IRS tax data do not contain information on how income is
split between spouses.\7 Even with information on how income is split
between spouses, though, much other necessary information-- for
example, the amount of a couple's home mortgage balance or which
spouse owns assets resulting in capital gains or losses\8 --is not
available. Although some studies\9 have been done making assumptions
as to how to allocate certain common tax items, such as itemized
deductions, other types of tax items, such as those identified above,
would be difficult, at best, to estimate and allocate without further
information.
To add some perspective to the many different provisions we describe
in this report, appendix V includes a list showing the numbers of
married and single taxpayers filing under some of the provisions
discussed herein; specifically, those provisions for which we could
quantify the number of taxpayers filing using IRS' public tax files.
However, these numbers do not in any way indicate the number of
taxpayers actually affected by the marriage penalty or marriage bonus
possible in application of the provision; as we have indicated above,
other factors must be considered before it can be determined that an
individual married couple is subject to a marriage penalty or bonus.
--------------------
\7 At the current time, taxpayers do not generally report information
on how income is split between spouses. The last time taxpayers
reported such information was in tax year 1986 on Schedule W,
Deduction for a Married Couple When Both Work. IRS is adding
information on earned income and other types of income to its
compilation of Statistics of Income tax data for tax year 1993;
however, this information will not be available until, at the
earliest, the beginning of next year.
\8 A married couple may be penalized because the amount of mortgage
interest deductible on a joint return is limited to that attributable
to a mortgage balance of less than $1 million; although the tax
return reports the total amount of interest deducted by the couple,
it provides no information on the total amount of the mortgage held
by the couple. Similarly, with capital gains and losses, the tax
return does not provide information on which spouse owned the
property sold for a capital gain or loss.
\9 See, for example, Daniel R. Feenberg and Harvey S. Rosen,
"Recent Developments in the Marriage Tax," National Tax Journal 48
No. 1 (March 1995): 91-101. In this article, the authors look at
the marriage tax for three IRC sections--on the tax rates, the
standard deduction, and the earned income credit. To calculate the
marriage tax, they assumed that itemized deductions would be reported
by the spouse with the higher income.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :5
Our objectives were to (1) identify provisions in the income tax code
that treat married and single taxpayers disparately, determining how
each section operates, and how its treatment of taxpayers varies
depending on marital status; (2) analyze each provision to determine
whether the provision can create a marriage penalty or marriage
bonus, or both; and (3) quantify, to the extent possible, the number
of taxpayers potentially affected by marriage penalties or marriage
bonuses.
To identify the income tax code provisions, we conducted a computer
search of the IRC using certain key words such as "joint," "married,"
and "spouse," and we examined the available literature on the
subject. Through this research we also determined how each section
operated, and how it dealt with married and single taxpayers. From
this analysis, we identified whether the specific treatment of
married and single taxpayers could lead to marriage penalties or
bonuses.
To determine the extent to which we could quantify the number of
taxpayers potentially affected by marriage penalties and bonuses, we
reviewed data available in IRS' public file on Statistics of Income,
a compilation of tax data from a sample of individual tax returns.
We also interviewed IRS staff responsible for research on individual
returns. In addition, we researched the relevant literature to
determine whether other theoretical models could provide sufficient
information to estimate the numbers of taxpayers affected by IRC
sections described in this report.
We did our work in Washington, D.C. between March 1996 and July 1996
in accordance with generally accepted government auditing standards.
AGENCY COMMENTS
------------------------------------------------------------ Letter :6
We requested comments on a draft of this report from the Commissioner
of Internal Revenue or her designated representative. At a meeting
held August 2, 1996, representatives of the IRS Office of Chief
Counsel suggested technical revisions to this report. We revised the
report as suggested.
---------------------------------------------------------- Letter :6.1
We are sending copies of this report to the Chairmen and the Ranking
Minority Members of the House Committee on Ways and Means, the Senate
Committee on Finance, and various other congressional committees; the
Secretary of the Treasury; the Commissioner of Internal Revenue; and
other interested parties. Copies will be made available to others
upon request.
The major contributors to this report are listed in appendix VII. If
you have any questions, please contact me on (202) 512-9044.
Sincerely yours,
Natwar M. Gandhi
Associate Director, Tax Policy
and Administration Issues
MARRIAGE PENALTIES AND BONUSES
ASSOCIATED WITH INCOME TAX
PROVISIONS ALLOWING SOME
ADJUSTMENT FOR JOINT AND SINGLE
INCOME
=========================================================== Appendix I
In this appendix, we describe nine income tax provisions that have
some type of tax adjustment (generally, a higher income limit) for
the combined income of married taxpayers filing jointly relative to
single taxpayers. The adjustments in this category, though, are
always less than twice the limit allowed to single taxpayers. These
sections include provisions that affect large numbers of taxpayers.
For example, section 1 sets the rate schedules for all taxpayers,
section 63 determines the standard deduction, and section 86 defines
when social security benefits are taxable.
Generally, all these sections have one pattern for a penalty and one
for a bonus--both of which are derived from the relative incomes of
the two spouses. A married couple may have a tax penalty if both
spouses have relatively equal income--in that case, their combined
income may put them into a higher rate bracket or give them a lower
deduction, even though individually each taxpayer would have been
eligible for a lower tax bracket or a larger deduction. However,
where the husband and wife have larger disparities in individual
income, the couple may get a marriage bonus--in this case, the spouse
with the higher income may owe less in a joint return than if he or
she were to file as a single taxpayer.
To illustrate these tax penalties and bonuses, table I.1 shows how
the tax rate under IRC section 1 affects the tax liabilities of two
hypothetical married couples with the same household taxable income.
For couple A, the husband and wife have the same taxable income while
for couple B, the wife earns all the household income. To indicate a
tax penalty or bonus, we compare the tax liability of these couples
as joint filers with that of unmarried individuals.
Table I.1
Comparison of How the 1995 Tax Rate
Schedule Affects Two Married Couples
Filing Jointly and as Singles
Husband Wife Husband Wife
------------------------------ -------- -------- -------- --------
Income $30,000 $30,000 0 $60,000
Combined income $60,000 $60,000
Tax if filed jointly $8,503 $8,503
Tax if filed as single $3,580 $3,580 0 $11,980
Combined tax as singles $7,160 $11,980
Amount joint tax differs from $1,343 -$3,477
tax as singles
Marriage penalty or bonus Penalty Bonus
----------------------------------------------------------------------
Source: GAO analysis of IRC section 1, assuming use of the standard
deduction.
As shown in table I.1, couple A are penalized $1,343 by filing a
joint return because their combined income puts them in a higher tax
bracket than if they were each taxed as single individuals. On the
other hand, couple B receive a $3,477 tax bonus by being able to file
a joint return because the wife's $60,000 income is taxed at a lower
rate filing jointly than it would have been had she been allowed to
file as a single individual.
Table I.2 describes nine income tax provisions that have some type of
tax adjustment.
Table I.2
1995 Income Tax Provisions With Some
Adjustment for Joint and Single Income
Treatment of
Code married Basis for
section Description taxpayers penalty Basis for bonus
-------- ---------------- ---------------- ---------------- ----------------
1. Tax rates are Except for the Relatively equal Relatively
Section set according to highest tax income between unequal income
1: Tax personal status: rate, the income two spouses-- between two
Imposed married or level at which tax rate would spouses--tax
on single. Income tax rates are be less if each rate would be
Individu tax rates are increased is filed as single greater if filed
als (tax progressively higher for than if filed as single than
rates) increased at married couples jointly. if filed
various income than single jointly.
levels, people. However,
depending on it is not twice
personal status. the level of the
The tax rates single income
range from 15 level. Thus, the
percent at the tax rate for
lowest income married couples
levels to 39.6 is increased
percent at the from 15 to 28
highest income percent when
levels. joint taxable
income is over
$39,000, while a
single person
pays 28 percent
if taxable
income is over
$23,350. Married
filing
separately is
taxed at 28
percent when
taxable income
is $19,500. At
the highest
income rate
(39.6 percent),
the income level
of $256,500 is
the same for
both married
couples filing
jointly and
single people.
2. If over 65 or The income Relatively equal Relatively
Section disabled, levels at which income between unequal income
22: taxpayer is the credit is two spouses-- between two
Credit eligible for reduced or credit would be spouses--credit
for the credit of up to eliminated are greater if each would be less if
Elderly $1,125 for higher for filed as single each filed as
and the married couples married couples than if filed single than if
Permanen and $750 for than single jointly. filed jointly.
tly and singles. people, but not
Totally However, the double. The
Disabled amount of the credit for
(elderly credit is married couples
credit) reduced (and with both
potentially spouses eligible
eliminated) by is eliminated
amounts one- when either tax-
half of tax- free social
free social security or
security and other nontaxable
pensions income is $7,500
received by the or more or AGI
taxpayer, and by is $25,000 or
amounts the more; for single
taxpayer's people, the
adjusted gross figures are
income (AGI) $5,000 and
exceeds certain $17,500,
limits. respectively. A
married couple
must file
jointly to get
credit unless
couple is
legally
separated or
taxpayer
qualifies as an
"abandoned
spouse."\a
3. Total amount of The operation of Relatively equal Relatively
Section tax credits from this provision income between unequal income
38: 11 various is dependent on two spouses-- between two
General business credits two other credit would be spouses--credit
Business cannot exceed provisions, greater if each would be less if
Credit either the section 55 on filed as single each filed as
tentative the alternative than if filed single than if
alternative minimum tax and jointly. filed jointly.
minimum tax or section 1 on tax
25 percent of rates. For both
regular tax these latter
liability over provisions, the
$25,000, income levels
whichever is for the tax
greater. rates are higher
for married
couples than
single people,
but not double.
If married
filing
separately,
level is one-
half of married
filing jointly
unless one
spouse has no
credit or
carryover or
carryback of the
credit.
4. Taxpayer who The income Relatively equal Relatively
Section gets certain levels for the income between unequal income
55: special minimum tax are two spouses-- between two
Alternat deductions and higher for a tax rate would spouses--tax
ive credits may be married couple be less if each rate would be
Minimum subject to an than a single filed as single greater if each
Tax "alternative person, but not than if filed filed as single
Imposed minimum tax" if double: married jointly. than if filed
(alterna income exceeds people are taxed jointly.
tive certain levels. if income is
minimum over $45,000,
tax) while single
people are taxed
if income is
over $33,750. If
married filing
separately,
level is
$22,500.
5. Rather than The amount of Both spouses One spouse's
Section itemize the deduction have income over income is less
63: individual for a married $6,400 and would than $6,400 and
Taxable deductions, couple is higher elect to file the spouse would
Income taxpayer can than for a individually not file
Defined take "standard single person, with the individually.
(standar deduction." The but not twice as standard
d amount of the much: married, deduction.
deductio deduction $6,550; single,
n) depends on $3,900. If
personal status. married filing
separately,
deduction is
$3,275 and the
other spouse may
not itemize.
6. Social security Threshold limits One spouse's Relatively
Section income may be at which social taxable income unequal income
86: taxed if security is may require between two
Social taxpayer has taxed are higher other spouse's spouses--tax on
Security other types of for a married social security individual
and Tier income. To be couple than a benefits to be benefits would
I taxed, the sum single person, taxed. be more than tax
Railroad of the other but not double: on combined
Retireme income plus one- if married, up income.
nt half of social to 50 percent of
Benefits security benefits will be
(social benefits must taxed if
security exceed certain threshold
benefits limits. exceeds $32,000,
) while if single,
$25,000. If
married filing
separately, any
other income
will result in
taxable social
security, unless
legally
separated, or an
abandoned
spouse, or live
apart from
spouse the
entire year.
7. Taxpayer who The limits at Relatively equal Relatively
Section redeems U.S. which the income between unequal income
135: savings bonds to exclusion is spouses-- between spouses-
Income pay college phased out are exclusion would -exclusion would
from expenses can higher for a be greater if be less if filed
U.S. exclude from married couple filed individually
Savings income the than a single individually than if filed
Bonds amount of person, but not than if filed jointly.
Used to interest earned double: for jointly.
Pay on the bonds. married couple,
Higher The exclusion is phased out if
Educatio phased out when modified AGI is
n the taxpayer's $63,450 and
Tuition modified AGI eliminated at
and Fees exceeds certain $93,450; for
(savings limits. single, the
bonds figures are
for $42,300 and
educatio $57,300,
n) respectively.
Married person
(unless
"abandoned
spouse") cannot
qualify unless
files jointly or
is legally
separated.
8. Taxpayer can The deduction Relatively equal Relatively
Section deduct $2,500 begins to be income between unequal income
151(d)(3 for each phased out at spouses-- between spouses-
): personal higher AGI for exemptions would -exemption for
Phaseout exemption--for married couple not be phased higher-income
of taxpayer, than single out if each spouse would be
Allowanc spouse, person, but not filed phased out if
e of dependents. The double: if individually. each filed as
Deductio deduction is married, over single rather
ns for phased out if $172,050; if than as married.
Personal AGI is above single, over
Exemptio certain limits. $114,700. If
ns married filing
(persona separately,
l deductions
exemptio phased out over
n $86,025.
phaseout
)
9. Taxpayer can The deduction Relatively equal Relatively
Section deduct up to begins to be income between unequal income
219(g): $2,000 per year phased out at spouses-- between spouses-
Retireme in tax-free higher AGI if deduction would -deduction would
nt individual filing joint not be phased be phased out if
Savings retirement return than out if each each filed as
(individ account (IRA). filing as single filed single rather
ual However, if also person, but not individually. than as married.
retireme in employer double the
nt pension plan, amount of the
account deduction is single taxpayer:
with reduced over if married,
employer certain modified phased out
plan) AGI levels. beginning at
modified AGI
over $40,000; if
single,
beginning at
modified AGI
over $25,000. If
married filing
separately, will
be phased out
when AGI exceeds
zero, unless the
married couple
lives apart for
whole year.
--------------------------------------------------------------------------------
\a See footnote 1 on page 1. A taxpayer who qualifies as an
"abandoned spouse" is not considered married for the purposes of the
IRC. Such a taxpayer may file as a single person or as a head of
household. This option is applicable for all code sections discussed
in this report.
Source: GAO's analysis of IRC provisions.
MARRIAGE PENALTIES AND BONUSES
ASSOCIATED WITH INCOME TAX
PROVISIONS THAT MAKE NO ADJUSTMENT
FOR JOINT AND SINGLE INCOME
========================================================== Appendix II
In this appendix, we describe 15 income tax provisions that each
allow some type of tax benefit--a credit, a deduction or an
exclusion--which is limited either in the amount of the benefit or by
the amount of total taxpayer income. For all these provisions, the
benefit and income limits are the same whether for two married
taxpayers or for one single taxpayer.
Each of these provisions offers the possibility of tax penalties to
married couples and, generally, there are two patterns of potential
marriage penalties. First, there would be a penalty when the joint
income exceeds the limit for the tax benefit, even though
individually one or both of the spouses could qualify for the
benefit. As an example, consider a husband and wife who each earn
$14,000, for a combined adjusted gross income (AGI) of $28,000.
Because IRC section 32 on the earned income credit limits the earned
income credit for 1995 to those taxpayers--married or single--with an
AGI less than $26,673, the couple would be ineligible for the credit.
However, if each had filed as a single taxpayer, both may have
qualified for the credit.
Another type of penalty is possible where the tax benefit is limited
to one amount--for either a married or single taxpayer--and the
married couple would have reported more than that amount if they had
each filed as single taxpayers. For instance, if two taxpayers each
have $3,000 in capital losses, for a total of $6,000 in losses, the
deduction limit of $3,000 in IRC section 1211 imposes a tax penalty
on a married couple.
However, nine of these provisions, including IRC section 1211 on
capital losses, offer possible tax advantages to a married couple
that are unavailable to two similarly situated single people. With
joint returns, taxpayers could pool their income and deductions,
using any available deductions to offset their combined income.
Thus, where one spouse has a deduction (or a loss), that amount could
be applied to reduce the income (or gains) of the other spouse.
Table II.1 shows the tax consequences of the marriage penalties and
bonuses related to section 1211 on capital losses. Couple A is a
hypothetical married couple where each spouse has sold property, each
losing $8,000 in long-term capital losses. With couple B, though,
the wife has incurred a long-term capital loss of $8,000 but the
husband has sold property for a long-term capital gain of $8,000.
Table II.1
Comparison of 1995 Tax Liability
Involving Capital Losses and Gains of
Two Married Couples Filing Jointly and
as Singles
Husband Wife Husband Wife
------------------------------ -------- -------- -------- --------
Taxable income (before capital $30,000 $30,000 $30,000 $30,000
gains or losses)
Capital gains (or losses) ($8,000) ($8,000) $8,000 ($8,000)
Capital loss deduction if ($3,000) 0
filed jointly ($3,000
maximum)
Tax if filed jointly $10,897 $11,737
Capital gains (or losses) if ($3,000) ($3,000) $8,000 ($3,000)
file as singles ($3,000
maximum loss deduction)
Tax if filed as single $4,532 $4,532 $7,612 $4,532
Combined tax as singles $9,064 $12,144
Amount joint tax differs from $1,833 -$407
tax as singles
Marriage penalty or bonus Penalty Bonus
----------------------------------------------------------------------
Source: GAO analysis of IRC section 1211.
As can be seen in table II.1, couple A's tax liability as a married
couple is $1,833 greater than their liability had they filed as
singles. As single taxpayers, they could deduct $6,000 in capital
losses, while they could deduct only $3,000 as a married couple.
Couple B, though, received a tax bonus when they filed jointly. As
married taxpayers filing jointly, they could use the wife's capital
loss to offset the husband's gain. As single taxpayers, however, the
husband would have had to report the full $8,000 as capital gain, and
the wife could have deducted only $3,000 of her capital losses from
ordinary income.
Table II.2 describes 15 income tax provisions that allow some type of
tax benefit.
Table II.2
1995 Income Tax Provisions With No
Adjustment for Joint and Single Income
Treatment of
Code married Basis for
section Description taxpayers penalty Basis for bonus
-------- ---------------- ---------------- ---------------- ----------------
1. Taxpayer who Income limits The combined Full-time
Section maintains more are the same for income of both student without
21: than 50 percent a married couple spouses may earned income
Expenses of household as for a single reduce credit, but otherwise
for expenses is person. A even though eligible for the
Househol allowed a credit married couple individually one credit, will be
d and for child-care must file or both spouses able to take
Dependen expenses of up jointly to get may be eligible credit if
t Care to $720 for one credit, unless for larger married.
Services child, $1,440 taxpayer is credit.
Necessar for two or more. legally
y for Credit is for separated or
Gainful 20-30 percent of qualifies as an
Employme expenses, abandoned
nt depending on spouse. Unless
(child- AGI, but cannot one spouse is a
care exceed full-time
credit) taxpayer's student, both
earned income. spouses must
The reduction of work, and credit
the percentage cannot exceed
begins at AGI in either spouse's
excess of earned income.
$10,000 and ends If spouse is a
at AGI over full-time
$28,000. student, the
spouse is
considered to
earn $200 per
month.
2. Low-income Income limits The combined Person with no
Section taxpayer with are the same for income of both children but
32: earned income a married couple spouses may with income less
Earned allowed credit. as for a single reduce or than limit
Income With two person. A eliminate marries person
Credit children, credit married couple credit, even with children
up to $3,110, generally must though and little or no
but eliminated file jointly to individually one earned income.
if AGI greater get credit, or both spouses
than $26,673. unless taxpayer may be eligible
With no qualifies as an for larger
children, abandoned credit.
allowed up to spouse.
$314, but
eliminated at
AGI of $9,230.
3. Performing Income limits The combined Married couples
Section artists whose are the same for income of both can pool income
62(b)(2) AGI without a married couple spouses may and deductions-
: regard to this as for a single eliminate -spouse eligible
Certain deduction is person. A deduction, even for deduction
Trade $16,000 or less married couple though has little or no
and may deduct must file a individually one income.
Business certain business joint return, or both spouses
Expenses expenses to unless taxpayer may be eligible.
of determine AGI, lived apart from
Qualifie rather than as a spouse for
d miscellaneous entire year or
Performi itemized qualifies as an
ng business abandoned
Artist deduction. spouse.
(perform
ing
artist
expense)
4. If AGI exceeds Income limits The combined None
Section $114,700, are the same for income of both
68: certain itemized a married couple spouses may
Overall deductions (not as for a single require
Limitati medical, person. If reduction in
on on investment married couple deductions, even
Itemized interest, elect to file though
Deductio casualty loss, separately, individually one
ns or gambling limit is or both spouses
(itemize loss) are $57,350. would not be
d reduced. required to
deductio reduce
n limit) deductions.
5. Taxpayer over 55 Exclusion amount Two unmarried None
Section who sells is the same for taxpayers would
121: principal married couple be eligible for
One- residence may as for single twice the amount
Time exclude up to person. Married of the total
Exclusio $125,000 in gain couples must exclusion.
n of from the sale. jointly elect to
Gain Taxpayer may exclude the gain
from elect to exclude whether filing
Sale of gain only once jointly or
Principa during lifetime. separately. Once
l having elected
Residenc to exclude gain,
e by must jointly
Individu revoke to
al Who revise. Married
Has filing
Attained separately may
Age 55 exclude up to
(one- $62,500.
time
resident
ial sale
exclusio
n)
6. Taxpayer can Limit on Two unmarried None
Section exclude employer exclusion is the taxpayers would
129: benefits for same for married be eligible for
Dependen child-care, up couple or single twice the amount
t Care to either $5,000 person. Married of the total
Assistan or the amount of couple is exclusion.
ce earned income, limited to the
Programs whichever is smaller amount
(employe smaller. of earned income
r child- by either
care spouse, and if
benefits filed
) separately,
total exclusion
cannot exceed
$2,500.
7. Taxpayer can Limit on Two unmarried Married couple
Section deduct interest mortgage taxpayers would can pool income
163(h)(3 costs on principal is be eligible for and deductions-
): mortgages from same for married twice the amount -spouse with
Qualifie one or two couple or single of the total deduction has
d residences and person. If deduction. less income than
Residenc on home equity married couple deduction
e debt. The files amount.
Interest mortgage balance separately, loan
(mortgag cannot exceed $1 limits are
e million, and the reduced to
interest amount of the $500,000 for
deductio home equity loan mortgage and
n) cannot exceed $50,000 for home
$100,000. equity, and each
spouse can only
deduct interest
from one
residence unless
other spouse
consents in
writing.
8. Taxpayer can Limit on loss Two unmarried Married couple
Section deduct losses of deduction is taxpayers would can split
165(l): uninsured same for married be eligible for deductions--
Losses financial couple as for twice the amount spouse with
in deposits as a single person. of the total lower income can
Insolven miscellaneous If married deduction. file separately
t itemized filing to meet AGI
Financia deduction, to separately, the percentage.
l the extent that limit is reduced
Institut losses are over to $10,000, with
ions 2 percent of respect to each
(uninsur AGI, up to financial
ed $20,000, with institution.
financia respect to each
l financial
deposit institution.
loss)
9. The cost of Limit on Two unmarried Married couple
Section certain tangible deduction is taxpayers would can pool income
179: personal same for married be eligible for and deductions-
Election property used couple or single twice the amount -spouse with
to over 50 percent person. If of the total deduction has
Expense for business can married filing deduction. less income than
Certain be treated as separately, the deduction
Business expense and limit would be amount.
Assets immediately automatically
(section deducted. The divided between
179 deduction is the spouses,
assets) limited to unless otherwise
$17,500. agreed.
10. Certain costs of Limit on Two unmarried Married couple
Section maintaining deduction is taxpayers would can pool income
194: timber property same for married be eligible for and deductions-
Amortiza can be amortized couple or single twice the amount -spouse with
tion of over 7-year person. If of the total deduction has
Reforest period. However, married couple deduction. less income than
ation taxpayer is files deduction
Expenses limited to separately, amount.
(refores $10,000 per limit is reduced
tation year. to $5,000.
deductio
n)
11. Taxpayer can Deduction Two unmarried Married couple
Section deduct losses amounts and AGI taxpayers would can pool passive
469: from rental real limits are the be eligible for gains and
Passive estate against same for married twice the amount losses--loss
Activity ordinary income couple as for of the total from one spouse
Losses only if taxpayer single person. loss; also, will offset gain
and is "active However, married combined income, from other
Credits participant." filing but not spouse; also,
Limited Deduction is separately individual generally can
(passive limited to cannot take income, reduces pool income and
activity $25,000 per deduction if the or eliminates deductions--
loss) year, and is spouses lived amount of loss spouse with
reduced if AGI together any deduction. deduction has
exceeds $100,000 time during the less income than
and eliminated tax year. If deduction
if AGI is over lived apart the amount.
$150,000. Excess entire year,
losses can be deduction
deferred to limited to
future years. $12,500, reduced
if AGI is over
$50,000, and
eliminated if
AGI is over
$75,000.
12. Taxpayer can Limits are same Two unmarried None
Section elect to roll for married taxpayers would
1044. over gain from couple as for be eligible for
Rollover sale of public single person. twice the amount
of stock if gain is If married of the rollover
Publicly reinvested in a couple files gain.
Traded small business separately,
Securiti licensed by the rollover amount
es Gain Small Business is limited to
into Administration. $25,000, or
Speciali The tax basis of $250,000 reduced
zed the small by amount
Small business stock previously
Business (which is used rolled over,
Investme to calculate whichever is
nt gain or loss on smaller.
Companie a later sale of
s (small that stock) is
business reduced by the
rollover rolled over
) gain. Limit on
rollover is
$50,000 a year,
or $500,000
reduced by
amount
previously
rolled over,
whichever is
smaller.
13. Beginning in Exclusion limit Two unmarried None
Section 1998, a taxpayer is same whether taxpayers would
1202: can exclude 50 for married be eligible for
50 percent of the couple or single twice the amount
Percent gain from sale person. If of the total
Exclusio of stock in married couple exclusion.
n for qualified small files
Gain business if separately,
from purchased at its taxpayer is
Certain original issue limited to $5
Small and held for 5 million reduced
Business years. Gain is by amounts
Stock limited to $10 previously
(small million reduced excluded or 10
business by amounts times the
stock previously taxpayer's basis
exclusio excluded or 10 in the business,
n) times the whichever is
taxpayer's basis greater.
in the business,
whichever is
greater.
14. Taxpayer can Deduction limit Two unmarried Married couple
Section deduct a net is same for taxpayers would can pool capital
1211: capital loss of married couple be eligible for gains and
Limitati $3,000 against or single twice the amount losses--loss
ons on ordinary income. person. If of the total from one spouse
Capital Excess over married couple loss. can offset gain
Losses $3,000 can be filing from other
(capital carried forward separately, spouse.
loss) into future annual deduction
years. is limited to
$1,500.
15. If estimated AGI limit is Combined spousal None
Section quarterly same for married income, but not
6654: payments are couple as for individual
Failure based on last single person. income,
by year's tax, If married increases amount
Individu taxpayer with couple files of estimated tax
al to AGI under separately, must to be paid
Pay $150,000 must pay quarterly 25 quarterly.
Estimate pay quarterly 25 percent of last
d Income percent of 100 year's tax if
Tax percent of last AGI is $75,000
(estimat year's tax. If or less. If AGI
ed AGI is over is over $75,000,
income $150,000, taxpayer must
tax) taxpayer must pay quarterly 25
pay quarterly 25 percent of 110
percent of 110 percent of last
percent of last year's tax.
year's tax.
--------------------------------------------------------------------------------
Source: GAO's analysis of IRC provisions.
MARRIAGE PENALTIES AND BONUSES
ASSOCIATED WITH INCOME TAX
PROVISIONS THAT FULLY ADJUST FOR
JOINT AND SINGLE INCOME
========================================================= Appendix III
The nine IRC provisions described below fully adjust for joint and
single income. The operations of these tax provisions are widely
different. Some of these provisions effectively treat married
taxpayers the same as if they were single people. IRC section 6017,
for example, requires that self- employment tax be calculated
separately on each spouse's individual self- employment income.
Section 213 allows a married taxpayer filing separately to report
medical deductions with the same limitations allowed a single
taxpayer. Other sections allow a married couple twice the benefit
allowed a single person. Thus, section 1244 permits married couples
to deduct $100,000 in losses, while a single person is limited to
$50,000.
For the most part, these sections can only result in the same, or
less, tax liability for married taxpayers than for single people.
Thus, the self- employment tax assessed on two married people should
always be the same as that assessed for a similarly situated
unmarried couple. Three sections-- section 213 on medical
deductions, section 165 on nonbusiness losses, and section 172 on net
operating losses--require that married taxpayers file separately to
take full advantage of the tax bonuses possible for a married couple.
When married taxpayers file separately, many tax provisions reduce or
eliminate the tax benefits available to the taxpayer. To take full
advantage of these three sections, therefore, a married taxpayer may
have to forgo other possible tax benefits, leading to a possible tax
penalty.
We illustrate the impact of a tax provision that allows married
taxpayers twice the benefit provided to single people in table III.1
below. In this table, we show how income tax section 1244, which
allows married taxpayers to deduct up to $100,000 on the sale of
certain small business stocks, would affect two married couples
filing jointly and as singles. Each spouse in couple A holds $50,000
in small business stock losses, while for couple B, the husband has
incurred $100,000 in losses by himself.
Table III.1
Comparison of How Section 1244 Loss
Deductions Affect Two Married Couples
Filing Jointly and as Singles in 1995
Husband Wife Husband Wife
------------------------------ -------- -------- -------- --------
Taxable income (before 1244 $60,000 $60,000 $60,000 $60,000
losses)
1244 losses $50,000 $50,000 $100,000 0
1244 loss deduction if filed $100,000 $100,000
jointly ($100,000 is maximum
loss)
Tax if filed jointly $3,004 $3,004
1244 loss deduction if filed $50,000 $50,000 $50,000 0
as single ($50,000 is maximum
loss)
Tax if filed as single $1,504 $1,504 $1,054 $13,876
Combined tax as singles $3,008 $14,930
Amount joint tax differs from -$4 -
tax as singles $11,926
Marriage penalty or bonus Bonus Bonus
----------------------------------------------------------------------
Source: GAO analysis of IRC section 1244.
As shown in table III.1, couple A's tax liability is nearly the same
whether the couple files jointly or as single individuals. In each
case, both spouses could deduct the full amount of their individual
section 1244 losses. Couple B, on the other hand, received an
$11,926 tax bonus by filing jointly because the husband's entire loss
(which is twice that allowed a single person) can be applied to
offset his wife's income.
Table III.2 describes nine tax provisions that fully adjust for joint
and single income.
Table III.2
1995 Income Tax Provisions With Full
Adjustment for Joint and Single Income
Treatment of
Code married Basis for
section Description taxpayers penalty Basis for bonus
-------- ---------------- ---------------- ---------------- ----------------
1. Taxpayer is Each married None Exemption amount
Section allowed to taxpayer is for one spouse
151: deduct $2,500 as allowed same with little or
Allowanc "personal exemption amount no income can be
e of exemption." as a single used to offset
Deductio Personal taxpayer; each larger income of
n for exemption also spouse is other spouse.
Personal allowed for allowed to
Exemptio spouse and all deduct $2,500.
ns dependents.
(persona
l
exemptio
ns)
2. Taxpayer can Married To take full Married
Section deduct certain taxpayers and advantage of taxpayers can
165: nonbusiness single taxpayers possible file separately
Losses losses: casualty are treated the marriage bonus to reduce AGI
(casualt losses, to the same--married related to levels; can also
y and extent that each taxpayers can casualty loss, pool gains and
gambling loss is over file separately spouses must losses.
losses) $100 and the net to reduce AGI file separate
casualty loss levels. Married returns.
exceeds 10 taxpayers are Separate returns
percent of AGI; subject to same would, in many
and gambling limits whether instances,
losses, up to filing jointly reduce or
amount of or separately. eliminate other
gambling wins. tax benefits
available to the
taxpayer.
3. In cases where Married To take full Married
Section casualty or taxpayers and advantage of taxpayers can
172: Net theft losses single taxpayers possible file separately
Operatin exceed total are treated the marriage bonus, to reduce AGI
g Loss income, the same--married spouses must levels; can also
taxpayer may taxpayers can file separate pool gains and
have a "net file separately returns. losses.
operating loss." to reduce income Separate returns
In this case, level. Married would, in many
the taxpayer can taxpayers are instances,
deduct amount subject to same reduce or
against taxes in limits whether eliminate other
either prior or filing jointly tax benefits
future years. or separately. available to the
taxpayer.
4. Taxpayer can Married To take full Married
Section deduct medical taxpayers and advantage of taxpayers can
213: expenses to the single taxpayers possible file separately
Medical, extent that the are treated the marriage bonus, to reduce AGI
Dental, expenses exceed same--married spouses must levels; one
Etc., 7.5 percent of taxpayers can file separate spouse can also
Expenses AGI. Taxpayer file separately returns. deduct expenses
(medical can also deduct to reduce income Separate returns paid for medical
expenses medical expenses level. Married would, in many costs of other
) for spouse and taxpayers are instances, spouse.
dependents. subject to same reduce or
limits whether eliminate other
filing jointly tax benefits
or separately. available to the
taxpayer.
5. If taxpayer is IRA deduction None "Special IRA"
Section not covered by for two married allows a larger
219: an employer taxpayers IRA deduction to
Retireme pension plan, calculated married taxpayer
nt taxpayer can exactly same as whose spouse has
Savings deduct up to single very little or
(IRA $2,000 per year, taxpayers. no income.
with no limited to However, if one
employer amount of earned spouse's income
plan and income. is less than
special $250, other
IRA) spouse can
deduct up to
$2,250 for both.
6. Taxpayer who Married None None
Section sells old home taxpayers
1034: and buys new allocate the
Rollover home costing at rollover of gain
of Gain least as much as on sale of a
on Sale the old home residence,
of must roll over without regard
Principa gain on sale by to who owned the
l applying the old home or who
Residenc amount of the bought the new
e gain to reduce home, if both
(residen the basis of the meet certain
ce new home. The requirements.
rollover tax basis of the
) new home is
reduced by the
gain. Can only
be used once
every 2 years.
7. Taxpayer can For married None One married
Section deduct loss from couples, the taxpayer can
1244: sale or exchange deduction limit deduct up to
Losses of certain small is twice that twice as much as
in Small business stocks allowed single single taxpayer.
Business against ordinary taxpayers--
Stock income, limited $100,000 if
to $50,000 per married filing
year. jointly.
8. Every taxpayer Married None None
Section with self- taxpayers
6017: employment calculate self-
Self- income over $400 employment tax
Employme must file a exactly as if
nt Tax return and they were two
Returns report on self- single
(self- employment tax. taxpayers--tax
employme is computed on
nt tax) separate
earnings of each
spouse. The
amount reported
on the joint
return is the
sum of the two
taxes.
9. Every taxpayer Married None None
Section may designate taxpayers
6096: that $3 be paid treated as if
Designat to the they are two
ion by Presidential single
Individu Election taxpayers--each
als Campaign Fund. spouse may
(preside designate $3 to
ntial campaign fund.
campaign
)
--------------------------------------------------------------------------------
Source: GAO's analysis of IRC provisions.
MARRIAGE PENALTIES AND BONUSES
ASSOCIATED WITH INCOME TAX
PROVISIONS THAT TREAT MARRIED
TAXPAYERS AS SPECIAL UNIT
========================================================== Appendix IV
Table IV.1 describes the operations of 26 IRC sections that treat
married taxpayers as unique units. For the most part, these sections
relate to special situations between spouses--for example, loans or
sales between husband and wife.
The purpose of many of these provisions was to regulate sham
transactions in commercial ventures. For example, IRC section 1092
taxes "straddles"-- business investments in which the taxpayer buys
two interests in property, each of which offsets the other. Under
the current tax law, the investor cannot recognize the loss in one
interest without realizing the gain in the offsetting investment. To
identify a straddle position, any property purchased by a wife that
offsets property previously purchased by her husband is considered to
be owned by the husband. Under certain circumstances, this provision
could create a tax penalty, where, for instance, both husband and
wife are independent investors. In that case, the married couple
might incur a greater tax liability than a similarly situated
unmarried couple.
Table IV.1
1995 Income Tax Provisions Treating
Married Taxpayers as Special Unit
Treatment of
Code married Basis for
section Description taxpayers penalty Basis for bonus
-------- ---------------- ---------------- ---------------- ----------------
1. Child under 14 If married Even if child's None
Section will be taxed at parents file custodial parent
1(g): parent's highest separately, files
Certain marginal rate. child is taxed separately, the
Unearned at the rate of child's unearned
Income the parent with income is taxed
of Minor the highest based on the
Children income. rate of the
Taxed as parent with the
if highest income.
Parent's
Income
(kiddies
tax)
2. Tax credit for Certain If husband and None
Section investment in partnerships wife are in a
42: Low- low-income with 35 or more partnership
Income housing project. partners are dealing with
Housing Credit must be treated as one low-income
Credit recaptured if taxpayer for the housing unit,
project fails to purpose of they will not be
meet program recapture unless considered
requirements. partnership independent
elects not to be investors for
so treated; a purpose of
husband and wife determining
are considered whether
one partner of partnership is
such a to be treated as
partnership. one unit for
purpose of
recapture.
3. A married Where married If unmarried, None
Section individual taxpayers file two taxpayers
63(c)(6) filing a separately, both could determine
: separate return spouses must individually
Certain is not eligible either itemize whether to
Individu for a standard their deductions itemize or use
als Not deduction if or elect to take the standard
Eligible spouse itemizes the standard deduction.
for deductions. deduction.
Standard
Deductio
n
(electio
n to
itemize)
4. A taxpayer need The spouse of a Two taxpayers, None
Section not include any "highly who are neither
125: amount in income compensated" married to each
Cafeteri solely because, employee may other nor is one
a Plans as an employee, have to include a dependent of
the taxpayer may income the other, would
choose among attributable to not be affected
different a choice of by this
compensation benefits if he provision.
benefits, unless or she is also a
the taxpayer can participant in
be considered a the compensation
"highly plan.
compensated"
employee.
5. Where a holder If the bond Two unrelated None
Section of a private holder's spouse taxpayers who
147(a): activity bond is is a are not married
Substant a "substantial "substantial to each other
ial User user" of the user" of the would each be
Requirem local facilities facilities able to use
ent of financed by the financed by the private activity
Certain bond, the bond bond, the bond facility without
Private is not eligible is not qualified affecting the
Activity for tax-exempt for tax-exempt tax status of
Bonds status. Any status. the other.
(private interest earned
activity from the bond
user) must be included
in income.
6. Private activity Any prior Two unrelated None
Section bond is not ownership of a taxpayers who
147(c)(2 qualified for farm, or receipt are not married
): tax-exempt of financing, by to each other
Limitati status if 25 the first-time would not be
on of percent of the farmer's spouse affected by this
Use of proceeds are to will be imputed provision and
Certain be used to buy to the farmer. neither would be
Private land except if bound by the
Activity land purchase is prior history of
Bonds for the use of a the other.
for Land "first-time
Acquisit farmer." First-
ion time farmer must
(private have never
activity previously owned
first- a farm and must
time not have
farmer) received over
$250,000 in
financing.
7. Self-employed Taxpayer can None If unmarried,
Section taxpayer can deduct costs of taxpayer cannot
162(l)(1 deduct up to 30 health insurance deduct costs of
): percent of for spouse and medical
Special health insurance dependents. insurance of
Rules costs. another person
for who is not a
Health dependent.
Insuranc
e Cost
of Self-
Employed
Individu
als
(self-
employed
health
insuranc
e)
8. Taxpayer can Taxpayer bound Two unrelated None
Section elect to deduct by deduction taxpayers who
263A(e)( costs of certain elected by are not married
2): plants used on spouse. to each other
Exceptio farm. would not be
n to affected by this
Capitali provision, and
zation neither would be
Requirem bound by the
ents for prior deductions
Farming elected by the
Business other.
es (farm
deductio
n)
9. No deduction is Married Two unrelated None
Section allowed for loss taxpayers cannot taxpayers who
267: from sale or deduct losses are not married
Losses, exchange of from to each other
Expenses property between transactions can deduct
and "related between spouses. losses from a
Interest parties." sale of property
with Related parties between them.
Respect includes spouse.
to
Transact
ions
between
Related
Parties
(related
party
losses)
10. For purposes of Ownership of Two unrelated None
Section certain stock by the taxpayers who
318: corporate taxpayer's are not married
Construc distributions spouse will be to each other
tive and adjustments, imputed to the would not be
Ownershi the taxpayer taxpayer. affected by this
p of will be provision, and
Stock considered to ownership of
(corpora own stock owned stock by one
te by members of would not be
ownershi the taxpayer's attributed to
p in family. the other.
distribu
tions);
also
sections
302, 304
11. Gain from the Ownership of Two unrelated None
Section sale, exchange, stock by the taxpayers who
341: or distribution taxpayer's are not married
Collapsi of a collapsible spouse will be to each other
ble corporation is imputed to the would not be
Corporat ordinary income. taxpayer. affected by this
ions provision, and
ownership of
stock by one
would not be
attributed to
the other.
12. Stock options or For the purpose Two unrelated None
Section employee stock of the taxpayers who
424(d): purchase plans limitation on are not married
Attribut provided to the tax-free to each other
ion of employee are not provision, would not be
Stock immediately ownership of affected by this
Ownershi taxable to the stock by the provision, and
p employee unless taxpayer's ownership of
(employe the employee spouse will be stock by one
e stock owns certain imputed to the would not be
options) amount of the taxpayer. attributed to
; also company's stock. the other.
sections
422, 423
13. An additional For the purposes Two unrelated None
Section tax will be of the number of taxpayers who
544: imposed on shareholders, are not married
Stock certain ownership of to each other
Ownershi undistributed stock by the would not be
p in income in a taxpayer's affected by this
Personal personal holding spouse will be provision, and
Holding company. To be a imputed to the ownership of
Companie "personal taxpayer. stock by one
s holding company" would not be
(persona there must be attributed to
l five or fewer the other.
holding shareholders and
companie 60 percent of
s); also the company's
sections income must be
542, 543 specified types
of income.
14. Independent The oil and gas Two unrelated None
Section producers and holdings of the taxpayers who
613(A)(c royalty owners taxpayer, the are not married
): are allowed to taxpayer's to each other
Exemptio use the spouse, and would not be
n of percentage other members of affected by this
Percenta depletion method the taxpayer's provision, and
ge to account for family are holdings of one
Depletio dwindling oil treated as if would not be
n and gas held by one attributed to
Limitati reserves. taxpayer. the other.
on for However,
Independ percentage
ent depletion is
Producer limited to a
s and production of
Royalty 1,000 barrels
Owners per day.
of Oil
and Gas
Wells
(percent
age
depletio
n)
15. Trust income A grantor/ Two unrelated None
Section will be income taxpayer's taxpayers who
672: to the grantor spouse is are not married
Related to the extent presumed to be a to each other
or that the grantor "subordinate would not be
Subordin has power to party" to the affected by this
ate control the use grantor, and not provision, and
Party to of the trust an independent one taxpayer
Grantor assets. If power trustee for could act as
of Trust over the trust control of the independent
(trust is exercised by trust assets. trustee for the
income); an independent The grantor is other.
also trustee, the also treated as
sections grantor will not holding any
674, be treated as power or
675, 677 the owner. interest of the
grantor's
spouse.
16. An interest in Taxpayer/ Sale of None
Section partnership seller's family partnership
704(e): purchased by one includes spouse, interest between
Partner' member of a ancestors, and two unrelated
s family from lineal taxpayers not
Distribu another is descendants. married to each
tive treated as a other would not
Share of gift from the be considered a
Family seller and the gift.
Partners fair market
hip value of the
(family purchased
partners interest will be
hip) considered
donated capital.
17. A taxpayer The housing None If unmarried,
Section living abroad expenses taxpayer could
911: can elect to excluded from not include
Citizens exclude from gross income housing expenses
or gross income a include those of another
Resident certain amount paid or incurred person into
s of the related to the for the housing cost
U.S. costs of foreign taxpayer's exclusion.
Living housing. spouse and
Abroad dependents.
(foreign
housing
allowanc
e)
18. A taxpayer with To the extent Between an None
Section offsetting that the unmarried
1092: investment taxpayer's couple, the
Straddle positions spouse holds an assets of one
s ("straddles") investment taxpayer would
cannot recognize position that not be
loss on these offsets that of attributed to
investments the taxpayer, the other.
until the gain the spouse's
is realized. investment
position will be
attributed to
the taxpayer.
19. Tax treatment of For purposes of If a couple is None
Section gain or loss gain and loss on not married to
1233: from short sale short sales, each other, the
Gains of property investments of assets of one
and depends upon either spouse taxpayer will
Losses whether the are attributed not be
from property used to to the other attributed to
Short close the sale spouse. the other.
Sales was a capital
(short asset.
sales)
20. Sale or exchange Any transfer of If taxpayers None
Section of a patent is a patent between unmarried to
1235: considered sale husband and wife each other
Sale or of a long-term will not be engage in sale
Exchange capital asset, considered sale of patent, the
of unless transfer of a long-term sale will be
Patents is between capital asset. considered that
(patents related parties. of a long-term
) capital asset.
21. Gain from sale Gains on sale Two unrelated None
Section of depreciable between husband taxpayers who
1239: property between and wife of are not married
Gain related parties depreciable to each other
from is considered property is can treat gains
Sale of ordinary income. treated as on sale of
Deprecia ordinary income. property between
ble them as capital
Property gains.
between
Certain
Related
Taxpayer
s
(related
party
gains)
22. Gain or loss The interest of Two taxpayers None
Section from contracts a spouse who who are not
1256(e): deemed section actively married to each
Mark to 1256 contracts participates in other would not
Market shall be treated management will be affected by
Not to as 40 percent not be treated this provision.
Apply to short-term gain as held by a
Hedging or loss and 60 limited partner
Transact percent long- or limited
ions term gain or entrepreneur.
(hedging loss.
transact
ions)
23.. Discount on In considering None Married persons
Section issuance of the personal can make loans
1272: certain bond or loan exception, between one
Current other debt husband and wife another without
Inclusio instrument must are treated as tax
n in be included in one person. consequences.
Income income as it
of accrues (it is
Original considered a
Issue form of
Discount interest).
(origina However, this
l income will not apply
discount if it is a loan
) between two
people, neither
in business to
make loans, and
the loan is less
than $10,000.
24. To qualify as an For the purposes None If both spouses
Section "S" corporation, of counting own S
1361: S a business shareholders, corporation,
Corporat cannot have more husband and wife only one will
ion than 35 are treated as count toward
Defined shareholders. one person. limit on number
of S corporation
owners.
25. Taxpayer has For the purpose Two unrelated None
Section certain limits of determining taxpayers who
1563: on multiple tax whether entity are not married
Controll benefits if is controlled to each other
ed Group associated with group would not be
Corporat certain corporation, affected by this
ion controlled spouse's stock provision, and
corporations. holdings are assets of one
attributed to would not be
the taxpayer. attributed to
the other.
26. If below-market Husband and wife None Married persons
Section interest rate on are treated as can make loans
7872: loan, IRS can one person. between one
Treatmen impute interest another without
t of income to the tax
Loans lender and consequences.
with interest expense
Below- to the borrower.
Market
Interest
Rates
(below-
market
loans)
--------------------------------------------------------------------------------
Source: GAO's analysis of IRC provisions.
NUMBER OF TAXPAYERS FILING UNDER
CERTAIN PROVISIONS CITED IN THIS
REPORT
=========================================================== Appendix V
We compiled, from data in IRS' 1992 Individual Public Use Tax File
for Statistics of Income, table V.1 showing the number of taxpayers
who filed under various provisions described elsewhere in this
report. The provisions included in this table are only those
provisions for which such information is available in IRS' public tax
file.\10 In addition to the number of taxpayers filing under each
provision, by filing status, we have also included (in the last
column) a cross-reference to the table where the provision has been
described in this report.
Table V.1
Numbers of Taxpayers Filing in 1992
Under Specific Provisions Cited in This
Report (Millions)
In
co
me
ta
x Cross-
pr Single Single reference
ov Married Married taxpayers taxpayers to table
is taxpayers taxpayers filing filing as where
io All filing filing individuall head of provision
n taxpayers jointly separately y household described
-- ----------- ----------- ----------- ----------- ----------- -----------
Se 113.60 48.02 2.46 48.58 14.45 Table I.2
c (1)
t
i
o
n
1
:
f
i
l
i
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g
s
t
a
t
u
s
o
f
t
a
x
p
a
y
e
r
s
Se 104.31 48.02 2.44 39.30 14.54 Table III.2
c (1)
t
i
o
n
1
5
1
:
p
e
r
s
o
n
a
l
e
x
e
m
p
t
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n
Se 80.07 25.15 1.53 40.92 12.47 Table I.2
c (5)
t
i
o
n
6
3
:
s
t
a
n
d
a
r
d
d
e
d
u
c
t
i
o
n
Se 26.98 20.00 0.62 4.65 1.71 Table II.2
c (7)
t
i
o
n
1
6
3
(
h
)
(
3
)
:
h
o
m
e
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g
a
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e
s
t
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u
c
t
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n
Se 23.31 10.02 0.40 9.40 3.50 Table III.2
c (9)
t
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6
0
9
6
:
p
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n
Se 14.10 4.93 not 0.36 8.81 Table II.2
c applicable (2)
t
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2
:
e
a
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d
i
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e
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r
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d
i
t
Se 12.78 7.47 0.15 4.80 0.35 Table II.2
c (15)
t
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n
6
6
5
4
:
e
s
t
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m
a
t
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d
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a
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a
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m
e
n
t
s
Se 12.24 8.42 0.22 2.94 0.66 Table III.2
c (8)
t
i
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n
6
0
1
7
:
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e
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f
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m
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t
t
a
x
Se 10.78 6.35 0.12 3.98 0.34 Table I.2
c (6)
t
i
o
n
8
6
:
s
o
c
i
a
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e
c
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i
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y
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e
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e
f
i
t
s
Se 6.40 4.32 0.06 0.06 1.96 Table II.2
c (1 and 6)
t
i
o
n
2
1
:
c
h
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l
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-
c
a
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(
p
l
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s
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c
t
i
o
n
1
2
9
d
e
p
e
n
d
e
n
t
c
a
r
e
)
Se 5.51 3.50 0.11 1.5 0.39 Table III.2
c (4)
t
i
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n
2
1
3
:
m
e
d
i
c
a
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x
p
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s
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s
Se (a) 4.44 (a) 2.80 (a) 0.06 (a) 1.41 (a) 0.17 Table II.2
c (b) 2.08 (b) 1.39 (b) none (b) 0.62 (b) 0.07 (14)
t
i
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1
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1
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n
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(
a
)
t
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(
b
)
w
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t
h
l
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s
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e
s
>
$
3
,
0
0
0
Se 3.66 2.59 0.05 0.87 0.14 Table II.2
c (11)
t
i
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4
6
9
:
p
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s
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s
Se 3.34 2.92 0.04 0.31 0.07 Table II.2
c (4)
t
i
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6
8
:
l
i
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a
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e
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Se 1.68 1.26 0.06 0.31 0.04 Table I.2
c (8)
t
i
o
n
1
5
1
(
d
)
(
3
)
:
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e
m
p
t
i
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n
Se 0.29 0.19 0.02 0.07 0.01 Table I.2
c (4)
t
i
o
n
5
5
:
a
l
t
e
r
n
a
t
i
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e
m
i
n
i
m
u
m
t
a
x
Se 0.25 0.21 <0.01 0.04 <0.01 Table I.2
c (3)
t
i
o
n
3
8
:
g
e
n
e
r
a
l
b
u
s
i
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s
s
c
r
e
d
i
t
Se 0.24 0.06 none 0.16 0.02 Table I.2
c (2)
t
i
o
n
2
2
:
e
l
d
e
r
l
y
t
a
x
c
r
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d
i
t
Se 0.14 0.11 <0.01 0.02 <0.01 Table IV.1
c (2)
t
i
o
n
4
2
:
l
o
w
-
i
n
c
o
m
e
h
o
u
s
i
n
g
c
r
e
d
i
t
Se 0.12 0.08 <0.01 0.02 0.01 Table III.2
c (2)
t
i
o
n
1
6
5
:
n
e
t
c
a
s
u
a
l
t
y
l
o
s
s
Se 0.01 0.01 <0.01 <0.01 <0.01 Table III.2
c (3)
t
i
o
n
1
7
2
:
p
e
r
s
o
n
a
l
n
e
t
o
p
e
r
a
t
i
n
g
l
o
s
s
--------------------------------------------------------------------------------
Source: GAO analysis of IRS data.
--------------------
\10 For many provisions listed in this report, information on how
many taxpayers filed under the provision was not available in IRS'
public file. For some provisions, such as section 135 on interest on
U.S. savings bonds used for education, information is reported by
the taxpayer but not available in IRS' public file. For other
provisions, such as section 267 on related party losses, the taxpayer
does not report any information on the application of the provision.
SUMMARY OF MAJOR PROPOSALS TO
CHANGE CURRENT TREATMENT OF
MARRIED AND SINGLE TAXPAYERS
========================================================== Appendix VI
Over the years there have been various proposals to change the tax
treatment of married couples and single people. These proposals
include: (1) mandatory separate filing by married couples using the
same rate schedule as single taxpayers; (2) optional separate filing
by married couples using the same rate schedule as single taxpayers;
(3) tax deduction or credit for two- earner couples; (4) allowing
single people to use the joint rate schedule; and (5) flattening the
rate structure. These proposals all adjust, to some extent, the
current balance among the principles of progressive tax rates, equal
taxation of families with equal incomes, and marriage neutrality. We
describe each of these proposals below.
(1) Mandatory separate filing by married couples using the same rate
schedule as single taxpayers. This proposal would require all
married taxpayers to file as single individuals, with one rate
schedule for all taxpayers. In effect, this change would reinstate
the tax system in place before 1948, and would impose different tax
burdens on families with the same income. To address the problems of
the different tax burdens in community property and common law
states, rules would have to be set up to allocate income and
deductions. Mandatory separate filing would eliminate the marriage
penalties and bonuses in the current rate schedule. However, if the
allocation rules for income and deductions were different for married
and single people, new penalties and bonuses could be created.
(2) Optional separate filing by married couples using the same rate
schedule as single taxpayers. As an alternative to mandatory
separate filing, married couples could be allowed the option to file
either under the joint rate schedule or the single rate schedule.
(Currently, married couples can file separately, but the amount of
taxable income at which the tax rates increase is much lower for such
couples than for single individuals.) As with the first proposal,
this would result in different tax burdens for families with the same
income and there would need to be rules for allocation of income and
deductions between spouses. Unlike the first proposal, though, there
would be a certain revenue loss because only those married couples
with tax decreases would be likely to file as single individuals.
(3) Tax deduction or credit for two-earner couples. Another proposal
would continue the existing system of joint returns, but would
provide some relief to two-earner married couples through a deduction
(or credit) equal to a percentage of the earned income of the spouse
with the lesser amount of earnings. While this proposal would not
make the system "marriage neutral," it would reduce the amount of the
marriage penalty to two-earner couples. A tax deduction was allowed
for two-earner couples between 1982 and 1986; this deduction was
repealed by the Tax Reform Act of 1986. As enacted, this deduction
provided lower taxes to all two-earner couples, not just those
previously subject to a marriage penalty. Thus, although this
reduced the marriage penalty for many couples, it also created
marriage bonuses for other couples.
(4) Single taxpayers file under the joint rate schedule. A fourth
proposal would allow single people to use the joint rate schedule.
In effect, this would lower the tax rates for single people. This
proposal would not lead to a system that would be "marriage neutral"
and would, in fact, tend to increase the marriage penalty for
two-earner couples. To be feasible, this proposal would need to be
supplemented by other relief for two- earner couples, such as the tax
deduction or credit described above.
(5) Flattening the rate structure. The final proposal would flatten
the rate structure for all categories of taxpayers. By itself, this
proposal would reduce the progressivity of the tax code. However, in
doing so, it would decrease the number of tax brackets, thereby
minimizing the effects of combining income on joint returns. When
the Tax Reform Act of 1986 repealed the two-earner deduction, it also
flattened the rate structure to reduce the marriage penalty to
two-earner couples.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
Ralph Block, Assistant Director, Tax Policy and Administration Issues
Nancy Peters, Evaluator-in-Charge
Cliff Tuck, Senior Economist
SAN FRANCISCO/SEATTLE FIELD OFFICE
Sam Scrutchins, Evaluator
*** End of document. ***