Chat Transcript: Kevin McCormally on the Marriage Penalty Tax

July 18, 2000 -- First Congress moved to eliminate the so-called death tax placed on estates. Now lawmakers are looking to remove the marriage penalty tax — the tax penalty that draws extra payments from an estimated 25 million two-income married couples.

How would the congressional measure affect your tax bill?

Tax expert Kevin McCormally of Kiplinger’s Personal Finance magazine responded to your questions in an online chat today.

Moderator at 2:58pm ET

Welcome Kevin McCormally.

Moderator at 2:59pm ET

Will this graduated tax cut really benefit every married couple?

Kevin McCormally at 3:01pm ET

Yes, I think every married couple would benefit, because the Republican plan would expand the 15% bracket. Part of everybody's income falls in the 15% bracket. Increasing the standard deduction, which is the other critical part of this change, would help only people who don't itemize deductions. That's about 75% of all taxpayers. But it's the 30% who itemize who suffer the most from the marriage penalty.

Every married couple would win under this plan, and that's a problem to some people, because right now about 25 million married couples get a marriage bonus — that is, they pay less tax than they would if they were single. The Republican plan being voted on today would increase that bonus.

Karen at 3:02pm ET

How much of a percentage would the new tax law reduce a married couple's yearly tax?

Kevin McCormally at 3:03pm ET

It depends on how much money you make now, and the mix between the husband's and the wife's incomes. The closer your incomes are, the more you currently are penalized for being married, and the more of a break you'll get. The farther apart your incomes are, the less of a penalty you suffer, or the bigger bonus you now receive.

One thing we know for sure is if you take the standard deduction, and the standard deduction is increased as proposed under this bill, it will save you somewhere between $200 and $400 a year.

Moderator at 3:04pm ET

Is the difference in the taxes paid between a married couple and a single person that significant?

Kevin McCormally at 3:05pm ET

The largest possible marriage tax penalty is $19,000. That's the most additional tax any two people pay, simply for getting married. That penalty applies if both husband and wife make $290,000 or more. The penalty can run anywhere from $0 to $19,074. So it can be significant.

If you go to the www.kiplinger.com Web site, we have a marriage tax penalty calculator that will show exactly how much of a marriage tax penalty you and your spouse pay now, or how much of a bonus you get.

Moderator at 3:07pm ET

What should couples ask their tax preparer about avoiding these types of taxes?

Kevin McCormally at 3:08pm ET

There are all sorts of ways people can save money on taxes. I think the first thing to do is forget about the marriage tax penalty. Ask you preparer how you can save money with your fringe benefits, with your retirement savings, and by using a home equity line of credit for your debt. The opportunities are numerous if you take a little time to investigate them. The Kiplinger Web site and the ABCNEWS Web site both have excellent information on how to save on taxes.

Moderator at 3:10pm ET

Don Adams asks:Does the proposed measure benefit married couples only if both are providing part of the family income? Is there any benefit for the family when the father is the wage earner and the mother is staying at home to raise the children?

Kevin McCormally at 3:11pm ET

Yes, there is a benefit to all married couples. This is one of the criticisms of the Republican approach. It cuts taxes for all married couples, which is great thing, but it doesn't focus only on two-earner couples, which are the ones who suffer the marriage tax penalty. That's the battle cry, but the approach affects all married couples.

Moderator at 3:11pm ET

As we began this chat, the Senate passed a "marriage penalty" bill that would provide $248 billion in tax relief over 10 years. The vote was 60-39 to approve the bill, which now heads for negotiations between the House — which previously passed a $182 billion version — and Senate on a final measure that could go to President Clinton this week.

Ray at 3:12pm ET

Why does Congress believe an annual income of $150,000 automatically makes a couple rich? Try living in areas like New York or San Francisco and you'll find that a $150,000 income makes you surprisingly middle class. Depending on our bonuses this year, my wife and I will probably be considered too rich to benefit from any of the marriage penalty tax proposals.

Absent meaningful reform, like a flat tax, Congress should tackle the regional cost of living differences that put average people in artificially high tax brackets.

Kevin McCormally at 3:14pm ET

A $150,000 income puts you at the absolute pinnacle of incomes in this country. That's why tax laws put you in one of the highest brackets. The tax laws can't differentiate on where people live or how they spend their money. Also, there is no $150,000 cap on the break that the Senate passed today. You and your wife, with an income that puts you within the top 1% of people in America, will get a break if the president signs this bill and the 15% bracket is expanded. Spend it wisely.

Richard from mcleod.net at 3:15pm ET

Why is the President threatening to veto this?

Kevin McCormally at 3:15pm ET

The veto threat is all part of the political game that's going on now. The Republicans want to get this bill to the White House in time for Clinton to veto it before the Republican convention starts in Philadelphia.

The president has offered to sign this bill, despite his reservations, if the Republicans will give him a Medicare drug benefit. The two sides are going to fight this out between now and the election to see which can pocket the most votes. Tax relief will really probably have to wait until next year.

Jimmy from 97.hostpool.rsmi.com at 3:18pm ET

Shouldn't they just increase taxes for singles instead of cutting them for married couples, to make it fair for everyone?

Kevin McCormally at 3:19pm ET

For decades, Congress has tried to figure out how to tax people with different marital statuses fairly. Until 1969, the law had provisions that were called a "single tax penalty." New rules went into effect during the Nixon administration aimed at solving the single tax penalty, and actually created what today we call the "marriage tax penalty."

It's a very complicated tax system, made all the more difficult when efforts to fine-tune it fall victim to politics. And believe me, single people don't want a tax increase.

Moderator at 3:21pm ET

What is the significance of the phase-out of the Estate Tax?

Kevin McCormally at 3:22pm ET

Congress voted last week to eliminate the estate tax over the next 10 years. That bill faces the exact same fate as the marriage penalty bill — President Clinton will veto it. Estate taxes are a funny issue. Only the richest 2% of Americans have estates big enough to worry about the estate tax. But we'd all love to be rich enough to have that concern; that's why people who would never pay the estate tax are so much against it.

It's a hot political issue, but I suspect it will die down when more people understand how few people are really affected by this tax.

Moderator at 3:24pm ET

Don't other deductions available to couples/families make the marriage penalty tax a minor annoyance?

Kevin McCormally at 3:25pm ET

It's not a minor annoyance to the politicians. You're right that married people get all sorts of breaks, but they also lose certain breaks. For example, the standard deduction for a single person is $4,400. For a married couple, it's not $8,800 — double the $4,400. Instead, it's only $7,350.

One thing about Americans is we rarely look at the benefits we're given. Instead we look at what we lose. Married folks focus on that $1,450 difference between the married standard deduction and two single deductions.

Lease from ikansas.com at 3:26pm ET

The government needs money to operate. If estate taxes, the marriage tax penalty, and other taxes go away, where will the money come from? Isn't this all just election year smoke and mirrors?

Kevin McCormally at 3:27pm ET

You have to remember that the Congressional Budget Office announced today that the budget surplus for the next 10 years will be twice as big as expected — more than $2 trillion. That's why tax cuts are on the agenda today.

Proponents say the government's taking in plenty of money to afford these tax breaks. On the other hand, opponents of these breaks say the surplus should be devoted to paying down the $5 trillion national debt. That's the battle we're going to be fighting between now and the November election.

Moderator at 3:29pm ET

dg asks:If my wife currently has less than $50,000 of income and we have one dependent, would it make more sense for her to not work, with this change in taxes? Currently it is close, but we gain a little from expenses vs. stay-at-home mom.

Kevin McCormally at 3:30pm ET

If your wife makes $50,000 a year, you can be sure the tax liability on that amount will be far less than $50,000. Do you come out ahead after paying taxes, child care expenses, and all other work-related costs? Only you can answer that question, but the bill passed by the Senate today would give you at least $400 in the plus column. That's how much your tax bill would go down, at a minimum.

EN at 3:31pm ET

I disagree totally with this nonsense of calling it a "marriage penalty." I just have to look around the office at all the people making comparable salaries — they have bigger houses, multiple cars, and a higher standard of living. Why? Because they are in a two-income family.

A higher household income (i.e. combined income) SHOULD owe/pay more taxes. They buy a house as one, make investments as one, etc. Two cannot live as cheaply as one, but together they have more to live on!! Equivalent individual standard deductions I could accept.

Kevin McCormally at 3:32pm ET

That's what this bill would do. The question at issue here is not the overall fairness or unfairness of the tax law, but simply the fact that if those married couples you're looking at had not tied the knot, they would be paying less tax than they are now. Congress hates the idea that "living in sin" pays off.

Richard from mcleod.net at 3:34pm ET

I guess the question should be: Do you think sometime in the future that this will definitely pass and be signed?

Kevin McCormally at 3:36pm ET

I do believe that some sort of marriage penalty relief will be enacted, probably early next year. Whether it will be the Republican approach, the Democrats' approach or something in between, we'll have to wait and see. But most voters are married people, and Congress likes voters. Add in the budget surplus, and you can count on some break pretty soon. I'm afraid the election might prevent it from happening this year, because the politicians would rather squabble over this issue than resolve it.

Moderator at 3:37pm ET

Will asks:Why should TWO people pay higher taxes that ONE person earning the same amount of money?? Because it is cheaper for two to live — is that what you are saying? Therefore, because they can save more, you want the government to take that savings away and give it to some deadbeat who has a handout?

Kevin McCormally at 3:38pm ET

The issue is not that two married people pay more tax than a single person with the same income. In fact, when the income is the same, the married couple would pay far less tax. The issue here is when two people with similar incomes marry, they will pay more tax on that combined income, as married couple, than the combined tax bill on their separate incomes as single people.

However, when the income is the same, a single person will pay more tax than a married couple. For example, on $100,000 of taxable income, a single person pays $25,771 in federal income tax. On that same taxable income, a married couple would pay $22,397. So in that case, the couple saves about $3,500.

Moderator at 3:40pm ET

Kevin, do you have any final thoughts?

Kevin McCormally at 3:41pm ET

I think this is really the beginning of the resolution of the marriage tax penalty. The next step is the president's veto — and I doubt that Congress will be able to override it. I do believe there is a slim chance that legislation on this issue could become law next fall if voters make it clear to the politicians that they'd rather have action than political squabbling and stalemate.

Moderator at 3:42pm ET

For continuing coverage on today's vote on the marriage penalty tax, click here now. Thank you for joining us.