We hear a lot of complaints
about bias against married couples. But if you want real, consistent
tax bias, look at what happens to unmarrieds.
Forget the marriage penalty. The fact is
singles get a worse break from the U.S. tax code than married people
do. Worse yet, sometimes you can be treated as a single even if youíre
Here are some of the biggest problems
Rates for single taxpayers are higher
than those for married taxpayers, whether filing jointly or married
filing separately. For example, for 2004, on taxable income of
$100,000, a single has a marginal tax rate of 28% and pays a tax of
$22,627. Someone filing as single head of household would pay $20,510.
Compare that to a married taxpayer with a
spouse who has no income. Now the marginal tax rate on that $100,000
drops to 25% and the total tax drops to $18,475. Thatís an additional
$4,152 that a single person has to pay on the same taxable income!
Letís be fair on two points.
The tax code reflects what Congress perceives as national values.
The government is all in favor of traditional marriage and wants to
encourage it. It also wants to encourage a host of other social
institutions, including homeownership, and fixes the tax code to
make those things happen.
Yes, the marriage penalty still hurts. If both spouses work, theyíll
probably pay a higher total tax than if they filed as single. Thatís
the traditional marriage penalty. But it sometimes works in reverse,
especially when one spouse has little or no income. The bigger the
disparity, the higher the tax on the single taxpayer.
No escape on estate taxes
In addition to the income tax, we still
have an estate tax. Thatís a separate tax on the transfer of wealth at
death. The transfer of wealth during life is subject to the gift tax.
Married couples get a special benefit in
the estate and gift-tax arena: the marital deduction. It means that
any transfers to a spouse, during life or at death, escape tax. Since
this only exempts transfers to a spouse, if youíre single, you again
get disproportionately slammed.
Hereís where we have to be really careful.
Your No. 1 employee benefit is health insurance. Itís almost always
available to an employeeís spouse. And, itís always going to be
tax-free to both the employee and the traditional spouse.
Not so for unmarried couples. While many
companies are voluntarily providing ďspousalĒ medical and dental
benefits to domestic partners, their tax-free nature depends on
whether the partner is a dependent of the employee. If so, thereís no
tax. If the partner is not a dependent, the employee is taxed on the
fair market value of the excess payment as additional wages. That
means more payroll taxes, as well as more income taxes, for you to
To qualify a partner as a dependent and get
tax-free status, you have to pass four tests:
You must provide more than half the support of the person youíre
claiming as a dependent. Support is whatís spent, not just whatís
earned or available.
The person supported must be either a specified relative or member
of your household. The IRS has decreed that the relationship of the
member of your household canít violate local law. However, any laws
currently on the books making cohabitation a crime are
Generally, the dependent canít file a joint return.
The dependent must be a U.S. citizen, or a resident of the United
States, Canada or Mexico.
If you want an
exemption for the dependent, youíll have to pass a fifth test, the
gross income test. Subject to exceptions, the dependent canít have
gross income in excess of the personal exemption amount, $3,100 for
When I die, my wife will inherit my 401(k)
and individual retirement accounts. Sheíll roll the money into her own
IRA and be able to avoid paying any tax until she later retires and
takes out the dollars.
Singles who donít have a qualifying
ďsurviving spouseĒ donít have that option. Their IRA beneficiaries can
spread withdrawals over their lifetimes, but they do not get
the right to delay the start of distributions.
With a 401(k), it can get even stickier.
Many companies donít want the responsibility of making lifetime
distributions to unmarried beneficiaries. Theyíll require the
beneficiary to take the money all at once. That eliminates any
deferral and probably pushes the beneficiary into a higher tax
bracket. When it comes to taxes, it sometimes sucks to be single.
The Child Tax Credit of as much as $1,000
per child phases out if adjusted gross income exceeds $110,000 on a
joint return. Single parents, even those who file as heads of
households, start to lose their credits as income exceeds only
$75,000. Singles lose again.
Social Security survivors
When I die, my wife will have a choice. She
can retain her own Social Security benefits or accept mine, whichever
is greater. If we were just living together as a couple, she wouldnít
have that option.
Unmarried couples also arenít eligible for
survivorís benefits. Once again, singles get the short stick. (Thereís
another way you and your partner can plan ahead and fill in the
cash-flow gap at death: Buy term life insurance for the higher
way to fight back: Update your will
Unmarried couples also face uncaring
inheritance laws. They have no rights outside a will. Without one,
even the most distant relatives have priority over a deceased
So, get your will updated!
On May 18, the first legal same-sex
marriage was performed in Massachusetts. Unfortunately, federal law
still defines a ďspouseĒ as a person of the opposite sex. That means
that married gays wonít qualify for Social Security survivor benefits
or family-leave benefits. They donít get the marital deduction for
gift or estate purposes and canít file jointly. Benefits should be
taxed based on the same ďdependentĒ analysis. But, Iíve yet to see
anything directly on point from the IRS.
I guess even if youíre married, in some
cases, the IRS is going to treat you as single. Especially when it can
take more money out of your pocket!
is the author of the best-selling, "How to Pay Zero Taxes," which is
in its 15th edition. He has written several other books on finance and
taxation including "TurboTax Deluxe," "How Much is it Worth? Asset and
Business Valuation," "The New Bankruptcy Law: A Professional
Handbook," and "Inside the IRS, How it Works (You Over)." A former
professor of taxation, accounting and finance, Schnepper has argued
before the U.S. Supreme Court and has appeared on numerous national
and local television programs. He lives in New Jersey.