To Have and to be Taxed: Marriage Can Cost You

Tax professionals across the country are diving deeper into the Patient Protection and Affordable Care Act now that is has been upheld by the Supreme Court to learn more about its tax and insurance implications.

Earlier this month more than 400 tax professionals poured through the legislation at a seminar and found areas that are not favorable to married couples. Here are a few examples that shocked a room full of tax experts and left us all wondering what else is hidden in the Health Care Act.

The new 0.9% Medicare surtax uses a $200,000 income limit for unmarried Americans, but only a $250,000 income limit for married couples. The Medicare surtax only applies to W-2’s and similar earned income. If John and Sue each make $195,000 in wages and live together they would not pay any Medicare surtax. If, however, they get married-their household income hits $390,000 and they would owe $1,260 in additional tax. Oh we knew marriage hurt, but now we are going to put a price tag on it.

The new 3.8% anti-investment tax also hits married couples. The tax only applies to interest, dividends and similar income. Let’s say that John and Sue each earn $195,000. If they were single or married they would not owe the anti-investment tax, but if they were to save money and each earn $15,000 a year in interest or dividends they would each owe an additional $380 in tax if they remain unmarried ($760 total), but a whopping $1,140 in additional tax if they were married. They would have been distinctly better off not saving a dime and spending all of their savings to avoid the tax. In this example, John and Sue would also owe the additional $1,260 from the previous Medicare surtax example if they were married, but not if they were unmarried. This poor couple spent $2,400 each year just for wedded bliss as a result of the Health Care Act.

These tax burdens don’t’ just hit married wealthy Americans. There is a new health insurance credit that will be available to Americans whose family income is 400% or less than the federal poverty level. Let’s say John and Sue each earns $30,000. Using the Health Care Act’s six-step process here is what their credit is for health care, as long as they remain unmarried:

John makes $30,000 annually as a single man and Linda makes $30,000 annually as a single woman. They live together but are unmarried, thus they will each calculate their own credit individually.

  • Step 1-Income $30,000
  • Step 2-Percentage of FPL 250%
  • Step 3-Personal Exemptions are “1”
  • Step 4-Silver premiums for zip code estimated at $5,000 annually
  • Step 5-Maximum annual premium $2,180
  • Step 6-Credit equals $5,000-$2,180 or $2,820
  • Their total credit is therefore $2,820 times 2 people or $5,640 every year

But again, if John and Sue get married here is what happens:

John makes $30,000 annually. His wife Linda also makes $30,000 annually. They file a joint tax return

  • Step 1-MAGI $60,000
  • Step 2- Percentage of FPL >400&
  • Stop-they do not qualify for the credit

If unmarried they receive $5,640 in credit but if they are married they receive $0 in credit.

Bob Jennings is a CPA, EA, RTRP and CFP and author of “Understanding Social Security & Medicare” His website is www.thecloudcpa.com and he can be followed on Twitter @Jenningsseminar