What it is:
The marriage penalty refers to the increased tax burden a married couple bears when they file a joint tax return versus filing two separate tax returns.
How it works (Example):
The marriage penalty is the result of the marriage tax laws created in 1969 -- when Congress attempted to give a tax advantage to married couples. The legislation was passed when a single large income or two disparate incomes for a household were common. However, the new tax advantage transformed from a benefit into a penalty as more marriages and households became dual-income.
There are still tax benefits to filing jointly for married couples with only one income. But if both spouses earn income, the likelihood of being hit with the marriage penalty increases for those who must file a joint return.
Illustrated in Figure 1 below is the marriage penalty for a couple with two children. Under the sub-head "Couple filing separately," the example shows the man's income taxed as "marrid filing separately" while the woman files as "head of the household." As the head of a household with children, in this example the woman can claim more personal exemptions.
The comparison result in Figure 1 shows that our hypothetical couple paid $4,561 more in taxes with a joint filing, compared to a "married filing separately" option. They were also hit with the alternative minimum tax (AMT). The marriage penalty ends up being 2.3% of the couple's adjusted gross income.
Recent measures have been made to alleviate and eliminate the marriage penalty tax discrepancies. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the impact of the marriage penalty by making the standard deduction the same for singles and married couples and by increasing the higher end of the 15% tax bracket for married couples filing jointly.
Why it Matters:
For 2010, the marriage penalty is triggered when each spouse earns over $68,650 -- moving the married couple both up to the 28% tax bracket. As a single filer, you would remain in the 25% tax bracket until your income climbs above $82,400. The marriage penalty only gets more severe for higher income marriages.
Some argue that the marriage penalty is more than offset by the economics of marriage. Housing and food costs for a married couple, for example, are generally less than those of two individuals living separately.
Taxpayers do not have a lot of discretion when it comes to deciding whether they file jointly or separately. In fact, "claiming the wrong filing status" is #5 on the InvestingAnswers tax error list, which you can read here: 10 Tax Errors to Avoid When Preparing Your Return.