How The End of The 2001/2003 Tax Cuts After 2010 Will Affect Two Single People Considering Marriage

Today we’ll continue our look at 2011 scheduled income tax changes by considering further Quincy from the last post.  Before we do, let me briefly review tax law changes in the last two weeks that you may have heard about in the news. 

President Obama signed the “Small Business Jobs Act of 2010” on September 27.  It’s beyond the scope of this post to comment on this act beyond saying that it is primarily about extending depreciation rules and allowing some 401(k) retirement plan participants to convert to Roth tax treatments.  It also levels the playing field on two specific issues – (1) Self-employed people will now get to reduce their social security/medicare taxes as well as their income taxes if they pay for a health insurance plan (this was already the case for W-2 employees).  (2) Cell phones are no longer considered “listed” property.  If you have a business, the IRS no longer will make you keep track of how much you used your phone for business and personal purposes so that they could make sure you didn’t deduct the personal part.

It’s safe to say, that while these may be fair and welcome changes, Congress is now apparently leaving any other tax law changes until after the November 2 elections -- at the earliest.  Which means that nothing has yet been done about the tax increases scheduled for January 1, 2011.  With that in mind, we will continue exploring how much these tax increases are going to be – by discussing our friend Quincy a little more.  To review,

·        Quincy is single and works full-time for about $9 per hour, earning $18,000 per year.  He lives with a couple roommates and shares living expenses with them.  For taxes he files single with no dependents.  His average weekly paycheck is $287.67. (Gross pay $346.15 less $20 federal withholding and $38.48 in other withholding taxes)  He files a 1040-EZ tax return each year because  his only source of income is the wages from his job and he does not have enough deductions to itemize.

·    In the last post, we saw that Quincy’s taxes will increase by $832 in 2011 compared with 2010.

So what happens if Quincy decides to marry anytime in 2011 (even December 31) and his new spouse, Matilda, has the identical work and tax facts that he does?   Our starting point is to realize that if he and Matilda don’t marry, their taxes will increase by $1,664 ($832 times two).  A key part of this is the standard deduction of $5,700 for each of them, totaling $11,400 for both of them.  Under current law, it wouldn’t matter if they married or not, this would be their standard deduction.  Under the old law that is about to return, the standard deduction for a married couple is 1.67 times that for a single person, not 2 times.  This works out to $9,519.  They will be taxed at 15% either way, so the difference in the standard deduction adds $282 to their taxes.

Let me say that one more time for clarity.  The return of the old tax law on January 1, 2011, will cost this couple that works for $9 per hour each, $1,664 in additional taxes each year if they don’t marry, and $1,946 in additional taxes if they do.

Let me take the story of Quincy and Matilda one step further.  If each earn a yearly salary of $43,350, (comfortable but certainly not $200,000+), their standard deduction and 15% tax bracket both shrink to 1.67 times the amounts for singles.  As two singles, they are at the top of the 15% bracket in 2010 and 2011.  Anything higher will be taxed at 25% in 2010 and 28% in 2011.  If they marry, the tax bracket change causes more than $13,000 to be taxed at 28% rather than 15% in 2011.

                                                                                                          2010                                                                                                               2011    

            ·          Adjusted Gross Income:                            $ 86,700                                                                                                     $  86,700

·          Standard Deduction                                     $ 11,400                                                                                                     $      9,519

·          Personal Exemptions (1 @ $3,650)    $    7,300                                                                                                     $      7,300

·          Taxable Income                                               $  68,000 (15% bracket becomes 25% here today)        $  69,881

·          Tax before credits                                          $    9,362 ($16,750 taxable@10%, $51,250@15%)       $  12,185 ($56,780@15%, $13,101@28%)

·          Making Work Pay Credit                             $       800 (Passed in 2009 for 2009 and 2010)                   $      -  0 -

·          Federal Tax After Credits                          $    8,562                                                                                                     $   12,185  ($3,623 higher in '11 vs. '10)

Letting the 2001-2003 tax cuts expire is going to affect everyone. 

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Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.