So your client's spouse is thinking about going back to work after a hiatus. They are both looking forward to all that expected cash and everything they can do with it. What they may not realize is the toll that the marriage tax may take on their expected monetary increase. For some couples, it is not even worth having the second spouse pursue a job for the financial aspect of it because the marriage tax can hit very hard indeed.
The problem with the marriage tax is that it causes the second spouse's income to be taxed at the highest rate the first spouse is being taxed at, and maybe even more. This is because the way the tax system works at this point, the second spouse's income is not taxed at the normal brackets it would be were that person single, meaning the first $26,250 is taxed at 15%, the next $37,300 at 28% and the rest at 31%, 36% and 39.6%. This is because as a married person, the additional income is just added on to the amount the first person is making, and therefore the second income winds up starting out getting taxed in the first spouse's highest bracket.
Not only will the additional income be taxed at the higher rate, Social Security and Medicare taxes will still be taken out of this second income as well. Add in state, city and federal taxes as well and they are probably taking a pretty hard tax hit. That hit may add up to only taking home 50 – 60% of the new second income. In addition, if they are considered a higher income family, they could also lose federal tax breaks if their adjusted gross income exceeds a certain amount between the two incomes. Itemized deductions start to lose value when their adjusted gross income exceeds $128,950 and personal exemptions begin to fade out when they hit $193,400. The $500-per-child tax credit phases out at $110,000 and they lose the $1,500 Hope education credit when their salary exceeds $100,000. The list goes on and on.
So before your client's spouse runs out there into the working world intending on bringing all this extra money to the family table, they really need to sit down and calculate if after all of the taxes are taken out of their spouse's income, whether or not it is financially worth the second spouses efforts. Not to mention, if their adjusted gross income goes up too far due to the second income and their joint adjusted gross income exceeds the specified amount for tax credits and such, they may just wind up saving money by retaining the second spouse's unemployed status.
