The Alternative Minimum Tax was intended to stop the very rich from having a 0% tax rate, but has had some strange unintended consequences. Since that tax was not indexed for inflation, it has creeped its way into the middle class’s check book. Today we’ll explain one weird consequence of the Alternative Minimum Tax: the AMT Marriage Penalty, a disincentive for some married couples to invest when caught in the AMT net.
The Marriage Penalty
The marriage penalty, in the regular tax code, refers to a situation where married couples paid more than they would if they had remained single. Many of the distortions in the regular tax code were rectified with the 2001 tax cuts, but the original penalty hit hardest at the margins of where people were just on the border of paying any tax. Wikipedia even says the average tax penalty in 1996 was $1,380 for the 42% sacked with the penalty, while 51% of taxpayer couples saw a benefit of $1,300 on average.
Enter the AMT Marriage Penalty
The Tax Policy Center at the Urban Institute and Brookings Institute took a look at the distortions of the AMT for high earners with children in two hypothetical couples – both making $250,000, but one split $150,000 – $100,000, and the other split $225,000 – $25,000.
Under the currently implemented AMT rules, the couple with the more even split would pay $2,846 more in taxes than if they were single, while the couple with the greater dichotomy would reduce its tax bill by $2,741. It gets worse: since the AMT rules out the Child Tax Credit, having children increases the Marriage Penalty in the AMT.
The dichotomy-couple has a penalty of $6,352 once they reach five children. Remember our friends with the closer earnings? Their penalty is $12,565. The rest of the details and the calculations are in the original source article, please patronize the TaxVox blog after this one!
The Marriage penalty boils down to the exemptions and tax brackets not being perfectly doubled for a couple’s salary. If these were the same, the worst that could happen would be no penalty or bonus for taxpayers – but since it isn’t setup to be twice a single taxpayer, the marriage bracket will continue to penalize couples who make a similar salary… especially in the high tax states which get hit with the most cases of the Alternative Minimum Tax. It’s enough to make one wish for comprehensive tax reform!