The federal income tax sometimes creates a marriage penalty. But usually not.
Most federal tax brackets, standard deductions and adjustments for married taxpayers are twice as big or wide as those for single taxpayers. And even when married taxpayers do pay a penalty? Usually the actual dollars aren’t gigantic. Often a few hundred bucks.
The new Washington state millionaire income tax works differently. Its mechanics create two pretty obvious marriage penalties. And the dollars can be large.
Two Brackets, Two Deductions
To really understand the new Washington state income tax, you probably need to read a hundred pages of statutes, regulations, fiscal notes, and guidance. (We’ve got a shorter discussion here: The New Washington Millionaires Income Tax.)
But for most practical purposes, taxpayers can think about the new tax this way:
The law creates a two-bracket income tax. The first $1,000,000 gets taxed at 0 percent. Amounts over $1,000,000 get taxed at 9.9 percent.
The law also provides two deductions. One deduction for charitable giving to in-state charities. Another deduction for gambling losses.
So, very roughly, Washington’s new millionaire tax is a two-tax-bracket, two-deduction income tax.
Hidden inside that apparent simplicity? Two marriage penalties.
Marriage Penalty #1: The $1,000,000 Bracket
Federal tax law usually gives married taxpayers wider tax brackets. For example, if two single taxpayers marry, the married couple generally does not lose half of their lower tax bracket space.
Washington’s millionaire tax does the opposite. A single taxpayer gets a $1,000,000 zero-percent bracket. A married couple also gets a $1,000,000 zero-percent bracket.
That means two unmarried taxpayers who each make $1,000,000 pay no Washington millionaire income tax.
But if those two taxpayers marry and each still makes $1,000,000? The couple reports $2,000,000 of income. The first $1,000,000 gets taxed at zero. The second $1,000,000 gets taxed at 9.9 percent.
The Washington tax equals $99,000.
That $99,000 is, in substance, a marriage penalty.
Marriage Penalty #2: The Charitable Contribution Deduction
The charitable contribution deduction creates a second marriage penalty.
For most taxpayers, a $100,000 charitable deduction limit sounds generous. And for ordinary taxpayers, obviously, it is.
But the millionaire tax targets high-income taxpayers. And high-income taxpayers often make large charitable contributions.
A single taxpayer paying the millionaire tax may deduct up to $100,000 of qualifying charitable contributions to in-state charities.
Another single taxpayer may also deduct up to $100,000.
But if those two taxpayers marry? The married couple does not get a $200,000 limit. The couple gets one $100,000 limit.
The lost $100,000 deduction increases Washington taxable income by $100,000. At a 9.9 percent tax rate, that costs $9,900.
That $9,900 is another marriage penalty.
Note: For more information about Washington state’s charitable deduction, including the limitations, see Charitable Deductions.
The Practical Point
Obviously, people don’t usually time a marriage or stay single because of a state tax rule.
But taxpayers affected by the Washington millionaire tax should understand the arithmetic. The law does not merely tax high-income married couples. It taxes some married couples more than it would tax the same two people if they remained single.
For ordinary federal income tax planning, marriage penalties often get overstated.
For Washington’s new millionaire tax, the marriage penalty is built directly into the basic formula.
Additional Resources
Surprising Statistics of the New Millionaire’s Income Tax
Washington State Residency Rules for the Millionaire’s Income Tax
The final signed version of the Washington State Millionaire Tax
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