Does your state have a marriage penalty?

Today’s map focuses on states that have a “marriage penalty” in their personal income tax brackets. Under a graduated rate income tax system, a taxpayer’s marginal income is subject to progressively higher tax rates. A marriage penalty or “marriage tax penalty” exists when a state’s income brackets for married taxpayers who file jointly are less than twice the width of the brackets that apply to single filers. In other words, married couples who file jointly in this scenario have a higher effective tax rate than if they filed as two single people with the same amount of combined income.

This non-neutral tax treatment is particularly detrimental to intermediate business owners, whose business income is taxed under the personal income tax system. Subsequently, under a state marriage penalty, married business owners are subject to higher effective tax rates on their business income than they otherwise would be.

Sixteen states have a marriage penalty in their personal income taxes. Fifteen of them are integrated into their support structure. Washington notably does not have a payroll income tax, but instead levies a capital gains tax with a $250,000 filing threshold. Because this threshold is not doubled for married filers, the state has an unconventional marriage penalty.

Seven additional states (Arkansas, Delaware, Iowa, Mississippi, Missouri, Montana, and West Virginia), plus the District of Columbia, fail to double the bracket width, but offset their marriage penalty in the bracket structure by allowing married taxpayers to file separately on the same return, avoiding loss of credits and exemptions. Ten states have graduated income tax but double their brackets to avoid a state marriage penalty: Alabama, Arizona, Connecticut, Hawaii, Idaho, Kansas, Louisiana, Maine, Nebraska and Oregon.

The ability to file separately on the same return is important in states that do not double the bracket width, as is the ability to do so even if the couple is filing jointly for federal purposes. While married couples have the option of filing separately – although some states only allow this if it is also done on their federal forms – it normally creates an inconvenience. It prohibits or reduces the value of deductions and credits available to the family jointly, which is also a form of state marriage penalty. Filing separately on the same return eliminates this problem, but is slightly more complex than doubling tax brackets for joint filers, so there is no penalty for joint filing.

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