Unlucky in Love, Punished by the IRS

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BOSTON (TheStreet) -- Marriage is discriminatory, with government-funded financial benefits that are unfair to singles.

Setting aside the national debate over same-sex unions, the above argument is increasingly touted by contrarians of all political persuasions. "Singlist" and "singlism" are among terms describing discrimination against the unvowed. The debate is also a hot topic in the U.K., where politicians are debating the merits of additional tax breaks for couples.

To what degree should the government reward taxpayers on the basis of their amorous union? Do singles get the short end of the stick in matters of both love and money?

The U.S. Census (using 2009 statistics) puts the number of unmarried Americans, 18 and older, at nearly 97 million, roughly 43% of the population; 53% of the unmarried are women, 61% have never been married, 24% were divorced, 15% were widowed and 17% (16.2 million) are 65 and older.

The number of households maintained by unmarried men or women was tallied at 52.5 million, 45% of households nationwide; 31.7 million people lived alone, 9.9 million single mothers lived with children, as did 1.7 million single fathers.

A 2004 study by the federal government's General Accounting Office identified a total of 1,138 federal statutory provisions classified to the U.S. Code in which marital status is a factor in determining or getting benefits, rights and privileges. More than 60 provisions of the Internal Revenue Code specifically apply to married couples.

"For tax rewards as well as penalties, those who are married, single or living together are treated differently under the tax law," says Mark Luscombe, principal federal tax analyst for CCH, a Wolters Kluwer business and provider of tax information, software and services. "Furthermore, the tax implications of different marital decisions aren't always clear."

In the not-so-distant past, there was what was considered "the marriage penalty," in which couples filing their taxes jointly would be disheartened to discover that their combined incomes pushed them into a higher tax bracket.

There is also the inverse, the "marriage bonus," in which a high-salary earner's tax burden is reduced by having a spouse whose lower income (or no income at all) carves the tax burden downward. The end result is that the breadwinner's taxes can be markedly less filing jointly than as a single.

The tax code rewards those already lucky in love in other ways.

Without filing a joint return, taxpayers may not be able to claim a variety of credits, such as the Child and Dependent Care Credit, Earned Income Tax Credit or education credits such as the Hope Credit and Lifetime Learning Credit.

A spouse is automatically deemed a "dependent" in the eyes of the law, even in a marriage in which the husband and wife have identical incomes, explains a CCH tax advisory. Under federal law, this makes group health coverage for the spouse a tax-free benefit when provided by an employer. And in the case where a spouse's $50,000 hospital bill is paid by an insurance plan, that's tax free as well.

By contrast, even when unmarried couples are granted "domestic partner" benefits by companies, their benefits are diminished through taxes. A group health policy for a domestic partner or same-sex spouse subsidized by an employer to the tune of $4,000 a year is treated as an additional $4,000 of taxable income for the employee.

Pensions and inheritances are another way legally recognized spouses benefit.

The surviving spouse in a two-sex marriage can inherit a husband's or wife's estate without any federal estate tax.

As of Jan. 1, the newly passed Tax Relief Act sets the estate tax exemption at $5 million per person. But it also introduces a two-year perk called "portability." The survivor can add the unused portion of their dearly departed's exemption to their own estate tax exemption, bypassing, in some cases, the need to shield money in a trust.

Social Security also offers survivor benefits that apply only to the married or once married. A husband or wife is entitled to draw their spouse's Social Security benefits after they die. The benefit is even allowed for couples that divorced before the death, provided they were married for at least 10 years.

There are situations, however, where married couples may get the worse of the deal.

The 2010 Tax Relief Act extends marriage penalty relief that was linked to the Economic Growth and Tax Relief Reconciliation Act of 2001, the standard deduction and the earned-income tax credit.

Before 2001, there were two main sources of the marriage penalty. The standard deduction allowed on a joint return was less than twice the amount of the standard deduction for single filers. Also, a couple could move into a higher tax bracket when their incomes were combined on their joint return. The standard deduction for joint filers has since been raised to double that of singles, and the 10% and 15% tax brackets are now twice as high for joint filers.

Beyond the 15% bracket, the "marriage penalty" lingers on, according to a scenario the CCH analysts offer:

"Lisa" and "Larry" each have a taxable income of $75,000, toward the top of the 25-percent bracket for single filers. As domestic partners who file individually, each pays income tax of $14,538 after the "Making Work Pay" credit. If they wed and the tax laws were marriage neutral, their tax would be twice that amount, or $29,078. But that's not how things work.

Filing jointly, Lisa and Larry report taxable income of $150,000. The 25% tax bracket for joint filers ends at $137,300, so the top $12,700 of their joint income is taxed at 28%, leading to a total tax bill of $29,443.50 -- a "marriage penalty" of $355.50.

"It's important to note that it's the distribution of income -- 50/50 between the two spouses -- that produces the penalty," CCH writes in an advisory. "If Lisa were a single professional with a taxable income of $150,000, she would not be eligible for the Making Work Pay credit and would owe $35,709.25. So she would reduce her income tax and reap a 'marriage bonus' of $6,265.75 if she were to marry a charming but penniless drifter."

Another scenario is two unmarried workers, each of whom earn $25,000 and has one child. Living separately, each can file as "head of household" and get an $8,400 standard deduction. Unmarried, each is entitled to an Earned Income Tax Credit of $1,680 and the $1,000 child credit each.

"All this eliminates their federal income tax obligations and even produces a payment to each one from the Treasury of nearly $2,000," CCH says. "But If these two low-wage workers decide to get married, they'll receive a higher standard deduction as joint filers, rather than heads of households."

"At $11,400, it's nowhere near double the amount (2 x $8,400) they were each entitled to as single parents. Worse, with $50,000 in wages, the couple no longer qualifies for the EITC. The bottom line is that the couple receives a refundable credit of only $34, and without the Making Work Pay credit, they would owe several hundred dollars in taxes, losing out financially as a result of getting married."

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