Wealthy Couples Can Save on Taxes If They Divorce

Extremely wealth married couples with roughly equal incomes pay more in taxes than they would if they were single.

As a general rule, the government often tries to promote family togetherness through the tax laws and other means. However, the tax rates currently in effect do the opposite for some affluent taxpayers.

The federal tax law has long had a "marriage penalty"--that is, married taxpayers must pay more than singles at some income levels. There is also a "marriage bonus"--that is, some married couples pay less than single individuals with the same total income.

Because of the way the tax brackets work, a marriage bonus most often results when two partners have widely diverging incomes, and a marriage penalty when they have roughly equal incomes. There can be a bonus with differing incomes because the addition of one partner’s small income (or no income where one partner does not work) to the other partner's much higher income is usually not enough to lift their joint return into a higher bracket. On the other hand, combining two incomes of equal or similar size into one joint tax return can lift the return into a higher bracket. The most significant marriage penalty is for two-earner couples who each have very high similar incomes.

Example: Abe and Zera are a married couple with no children who work as highly compensated hedge fund managers. Let's assume that, after all their deductions, they each have $400,000 in taxable income. In 2016, they would each pay $115,529 in income tax, for a total of $231,058 if they filed as single taxpayers. If they file as married filing jointly, their total tax would be $262,466. That's over $30,000 more than if they were single.

Why the difference? As shown by the following chart, if they file as single, the top income tax rate for each partner’s $400,000 in taxable income is 33%. If they file jointly, their top bracket on their combined $800,000 in taxable income is 39.6%.

Tax Bracket

2016 Income if Single

2016 Income if Married Filing Jointly

10%

Up to $9,275

Up to $18,150

15%

$9,276 to $37,650

$18,151 to $75,300

25%

$37,651 to $91,150

$75,301 to $151,900

28%

$91,151 to $190,150

$151,901 to $231,450

33%

$190,151 to $413,350

$231,451 to $413,350

35%

$413,351 to $415,050

$413,351 to $446,950

39.6%

All over $415,050

All over $446,950

What about staying married and filing as married filing separately? This doesn't solve the problem because, as the following chart shows, at higher income levels there are separate tax brackets for married people filing separately that are not as favorable as those for singles.

Tax Bracket

2016 Income if Single

2016 Income if Married Filing Separately

10%

Up to $9,275

Up to $9,275

15%

$9,276 to $37,650

$9,276 to $37,650

25%

$37,651 to $91,150

$37,651 to $7,950

28%

$91,151 to $190,150

$7,951 to $115,725

33%

$190,151 to $413,350

$115,726 to $206,675

35%

$413,351 to $415,050

$206,676 to $233,475

39.6%

All over $415,050

All over $233,476

From our example above, if Abe and Zera both filed married filing separately, they each would pay $131,233 in income tax, for a total tax of $262,466--over $30,000 more than if they filed as single taxpayers. This is the same total tax they would pay if they file as married filing jointly.

The moral: Extremely wealth married couples with roughly equal incomes could save substantial income taxes by divorcing.

For more on the marriage penalty, see the interactive chart prepared by The New York TimesTax Day: Are You Receiving a Marriage Penalty or Bonus?

 

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