The tax package that House Democrats unveiled this week would increase so-called marriage penalties for wealthy couples.
Couples who file joint tax returns face marriage penalties if their income tax bill is higher than those who file as single taxpayers.
Penalties are more common when each spouse earns the same amount of income, according to the Tax Policy Center. Penalties exist in the current rules, although the Republican tax law of 2017 reduced their scope.
The House law – which levies an estimated $ 2.1 trillion in taxes over a decade to extend America’s safety net and other measures for businesses and the wealthy – amplifies existing sanctions.
The proposal would increase the top tax rate from 37% to 39.6%. A single filer with income greater than $ 400,000 in 2022 will pay this rate. However, the income limit of $ 450,000 for married couples filing jointly is not very high. (In this context, it would have to be doubled, or $ 800,000, to avoid the marriage penalty.)
(Currently, a single tax filer with income over $ 523,600 pays the highest rate, compared to $ 628,300 for married couples.)
“There is clearly a big marriage penalty,” said Leon LaBreak, accountant and certified financial planner at Sequoia Financial Group, of the House Act.
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The effect of the penalty will be beyond the income tax on the payroll. A new top federal tax rate of 25% on investment income (from stocks and appreciated dividends) will also come into effect in 2022 at the $ 400,000 (single) and $ 450,000 (married) levels.
“It’s not everyday Americans [who’d be affected by the change]”Said Paul Auslander, CFP and director of financial planning at Provision Management Group, of the income limit.” It’s too high. “
Depending on the couple, the variation could amount to several thousand dollars in additional taxes per year, he said.
“It’s not a stupid change,” he said. “It’s not going to break anyone, but it’s a bore.”
There could be several amendments as lawmakers continue to debate the outline of the full package, which could cost up to $ 3.5 trillion.
The success of the law is not guaranteed because of the Democrats’ very slim margins in the House and Senate and the competition for how the wealthiest Americans should be taxed.
Auslander said House Democrats set income brackets for married couples to raise more money for their program. Reducing or eliminating the marriage penalty would mean less tax revenue.
Over time, the proposed top tax rate and income bracket would raise $ 170.5 billion over a decade, according to the Joint Committee on Taxation, Congress’ non-partisan tax pointer.
If the marriage penalty is upheld by the legislative process, high-income couples can change their financial plans.
For example, couples may consider filing separate income tax returns or even living on their own, LaBreak said.
According to the Tax Policy Center, filing a separate tax return often results in a higher tax burden under current law.
However, domestic law may not make this route a money-saver for many people – couples filing separately will hit the top 39.6% after earning $ 250,000.