The following analysis was published on the MSN Money Central website on June 23, 2004.  It contains an excellent summary of how unmarried taxpayers often are penalized on account of their marital status by the tax codes. 

The Basics

How the tax code makes singles suffer

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.

By Jeff Schnepper

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 married.

Here are some of the biggest problems singles face:

Bracket non-benefits
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.

Employee benefits
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 pay.

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 constitutionally suspect.
  • 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 2004.

Retirement restrictions
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.

Child care credit
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 earner.)

One 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 partnerís property.

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!


Jeff Schnepper
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.