Tax Administration: Income Tax Treatment of Married and Single Individuals (Letter Report, 09/03/96, GAO/GGD-96-175). Pursuant to a congressional request, GAO provided information on certain income tax code provisions that result in marriage penalties or marriage bonuses, focusing on: (1) those income tax provisions that depend on taxpayers' marital status for their applicability; and (2) the number of taxpayers affected by marriage penalties or bonuses. GAO found that: (1) there are 59 provisions in the income tax code where tax liability depends at least partially on the taxpayer's marital status; (2) the provisions on the tax rate, the standard deduction, and the earned income credit are most commonly discussed in connection with marriage penalties and bonuses; (3) nine provisions, such as those on the tax rate and social security taxation, make some adjustment for the differences between joint and single income, but adjustments for married couples filing jointly are less than twice those allowed to single taxpayers; (4) those tax provisions limiting capital losses and the home mortgage interest deduction have only one limitation that applies equally to married and single taxpayers; (5) nine other provisions, such as those on the personal exemption, treat married couples as if they are single individuals or provide couples with twice the benefit allowed a single person; (6) 26 provisions treat a married couple as a unique, indivisible unit for tax purposes; (7) 56 of the 59 tax provisions could result in a marriage penalty or bonus depending on the taxpayer's individual circumstances; (8) the single most important factor that determines the provisions' effect on married couples is how income is divided between spouses; (9) couples with disparate incomes generally could enjoy a marriage bonus, while couples with equivalent incomes generally incur a marriage penalty; (10) other factors affecting couples' tax liability include which spouse owns property, has capital gains or losses, and is qualified for tax deductions and credits; and (11) the impact of marriage penalties and bonuses varies widely, both in terms of the number of taxpayers affected and the dollar amounts involved, but existing data is insufficient to quantify these numbers. --------------------------- Indexing Terms ----------------------------- REPORTNUM: GGD-96-175 TITLE: Tax Administration: Income Tax Treatment of Married and Single Individuals DATE: 09/03/96 SUBJECT: Personal income taxes Taxpayers Tax administration Tax law Tax credit Fines (penalties) ****************************************************************** ** This file contains an ASCII representation of the text of a ** ** GAO report. 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For further details, please ** ** send an e-mail message to: ** ** ** **** ** ** ** with the message 'info' in the body. ** ****************************************************************** Cover ================================================================ COVER Report to the Honorable Orrin G. Hatch, U.S. Senate September 1996 TAX ADMINISTRATION - INCOME TAX TREATMENT OF MARRIED AND SINGLE INDIVIDUALS GAO/GGD-96-175 Tax Treatment of Married Individuals (268730) Abbreviations =============================================================== ABBREV AGI - adjusted gross income IRA - individual retirement account IRC - Internal Revenue Code IRS - Internal Revenue Service Letter =============================================================== LETTER B-272101 September 3, 1996 The Honorable Orrin G. Hatch United States Senate Dear Senator Hatch: This report responds to your request for information on income tax provisions in the Internal Revenue Code (IRC) that potentially create "marriage penalties" or "marriage bonuses" with respect to the tax liability of married couples. As defined herein, a marriage penalty results when two married individuals have a greater tax liability than two similarly situated single individuals, i.e., individuals with the same total income. Conversely, a marriage bonus results when a married couple owes less taxes than two similarly situated single individuals. This report (1) summarizes the current income tax provisions in the IRC whose applicability depends upon whether a taxpayer is married or single, (2) identifies those provisions likely to result in marriage penalties or marriage bonuses or both, and (3) discusses the feasibility of quantifying the numbers of taxpayers affected by the marriage penalties and bonuses. BACKGROUND ------------------------------------------------------------ Letter :1 Current federal income tax law divides individual taxpayers into two major groups--those who are married and those who are single. Married people can file jointly with their spouse or can elect to file separately ("married filing separately"). Single people file either as an unmarried taxpayer or as an unmarried taxpayer maintaining a household with dependents ("head of household"). A married person may file as a single person only under limited circumstances.\1 For the most part, married taxpayers file jointly with their spouse.\2 Traditionally, the tax treatment of married and single taxpayers has involved trade-offs among three basic principles: (1) there should be progressive tax rates, with successively higher income brackets taxed at increasingly higher rates; (2) families with equal income should have equal tax burdens, notwithstanding how the income is divided between spouses; and (3) individual tax liability should not change when people marry (the tax system should be "marriage neutral"). The trade-offs among these principles exist because, as public finance experts have long recognized, a tax system cannot satisfy all three principles simultaneously. An example of the trade-offs is our current tax system, which has progressive tax rates and taxes married couples with the same income equally. However, this can result in the income of some married couples falling into different tax brackets than would be the case if they were to file as single individuals. Therefore, the present tax system is not "marriage neutral" and two married people may not have the same tax liability as two similarly situated single people. Generally, large income differences between spouses can lead to marriage bonuses while roughly equal incomes can lead to marriage penalties. The equity of the comparative treatment of married and single people under the income tax laws has been the subject of debate for nearly the past 50 years. In 1948, Congress permitted married couples to split their income between spouses if they reported the income on a joint return. For most married couples at the time, this change led to lower tax liability.\3 Since that time, most married people have elected to file jointly, while most unmarried people file as single individuals. In general, the debate over the most equitable way to deal with married and single taxpayers has focused on the tax rate structure. Beginning in 1948, the rate schedules were structured so that the tax liability for married taxpayers was never more than--and could be up to 42 percent less than--that of similarly situated single people. To correct the apparent inequity in the tax rate for single people, Congress enacted a separate rate schedule for single taxpayers in 1969, providing that the tax liability for a middle- income single person could be no more than 20 percent greater than that for a married couple with the same total income. This rate change, however, created a new "marriage penalty" for certain married couples if both spouses earned approximately the same income.\4 Notwithstanding the focus on the rate structure, many other provisions of the income tax code take into account the fact that one large group of people reports jointly as a household, while the other large group reports as single earners.\5 This adds complexity to the income tax code, and the continuing possibility of tax breaks for some, under certain circumstances, and tax penalties for others, under different circumstances. Over the years, various proposals have been made for dealing with these inequities. We summarize the major proposals in appendix VI of this report. -------------------- \1 A married taxpayer can file as a single taxpayer or as a head of household if he or she is legally separated under a decree of divorce or separate maintenance, or if he or she qualifies as an "abandoned spouse" under IRC section 7703(b). To be considered an abandoned spouse, the taxpayer must have maintained a household for a dependent child, provided over 50 percent of the household expenses for the tax year, and lived apart from his or her spouse for the last 6 months of the tax year. \2 In 1992, about 95 percent of all married taxpayers filed jointly. At present, the income tax rates are structured to discourage married taxpayers from electing to file separate returns. Under current law, such an election would lead to higher taxes in most cases. \3 The change came about after inequities arose between married taxpayers in "community property" states and those in "common law" states. Because community property states required spouses to split income between one another, typically the tax liability for taxpayers in these states was less than that of taxpayers in common law states. By allowing all married couples to split their income when reporting jointly, the differences in federal tax liability were effectively eliminated. \4 With the new rate schedule, married taxpayers were not allowed to file as single individuals. If, therefore, two married people with roughly equivalent incomes were bumped up into a higher tax bracket than either would be in had each filed individually, the new law provided no relief. \5 In 1992, 42 percent of taxpayers filed jointly with their spouse, while 43 percent of taxpayers filed as single individuals. RESULTS IN BRIEF ------------------------------------------------------------ Letter :2 We identified 59 provisions in the income tax code where tax liability depends, at least in part, on whether a taxpayer is married or single. These provisions include three IRC sections most commonly discussed in connection with marriage penalties and bonuses: the sections on the tax rate, the standard deduction, and the earned income credit. The remaining 56 provisions are less frequently discussed and include many different types of tax law provisions, such as those dealing with taxation of social security benefits, limitations on capital losses, and the home mortgage interest deduction. When enacting these varied provisions, Congress has dealt with the equities between income reported jointly by most married couples and the single income reported by most single people in different ways, which we categorize into four groups. One of these groups encompasses nine provisions, such as those on the tax rate and social security taxation, for which Congress has created different sets of requirements for married and single people, making some adjustment for the differences between joint and single income. For a second group encompassing 15 other provisions, such as those limiting capital losses and the home mortgage interest deduction, the laws include only 1 limit for both married and single taxpayers. For a third group of nine provisions, like that allowing a personal exemption, Congress has treated married couples as if they were single individuals, or provided them with twice the benefit allowed a single person. A fourth group consists of 26 provisions under which married people are considered a unique unit for the purpose of the tax code section. The different ways that married and single people are treated under the income tax code could lead to situations where the tax liability of married taxpayers is not the same as that of two similarly situated single taxpayers. As defined in this report, these situations may result in either a marriage penalty (married couple owes more tax) or a marriage bonus (married couple owes less tax).\6 All but 3 of the 59 income tax provisions we identified could result in a marriage penalty or a marriage bonus, depending on the individual circumstances of the taxpayer. The marriage penalties and bonuses associated with the various provisions discussed in this report follow several patterns, but all hinge upon the individual circumstances of the married couple. The single most important factor in these situations is how income is divided between spouses. Generally, disparate income between spouses could lead to marriage bonuses, while equivalent income could result in marriage penalties. Thus, where one spouse has a high income and the other spouse has little or no income, tax rates for the married couple filing jointly would be lower than had each spouse filed individually--a marriage bonus. If, though, both spouses earn roughly the same income, their combined income may increase their tax rate beyond what either would have had as a single filer--a marriage penalty. Marriage penalties and bonuses related to many provisions, though, are tied to other individual factors, such as which spouse owns property and which spouse is qualified for tax deductions and credits, in addition to the split of income between husband and wife. For example, current law limits deduction of capital losses from ordinary income to $3,000 for either a married couple or a single taxpayer. If husband and wife have capital losses of $3,000 each, the law leads to a marriage penalty--the couple would be able to deduct $6,000 as single taxpayers instead of $3,000 filing jointly. On the other hand, if one spouse has $8,000 in capital losses and the other has $8,000 in capital gains, the capital loss completely offsets the capital gain, leading to a marriage bonus. The impact on taxpayers of marriage penalties and bonuses is widely varied, both in terms of the numbers of taxpayers potentially affected by the provisions and in terms of the dollar amounts involved in the tax liability. To assess the comparative importance of these many different provisions, we attempted to quantify the number of taxpayers potentially subject to the specific marriage penalties and bonuses. However, when we examined the information available, we determined the current data insufficient to make such an assessment. -------------------- \6 Public finance experts have long recognized alternative views in determining when tax schedules are "neutral" with respect to marriage. As one example, if two can live together cheaper than two people alone, then a couple living together may be viewed as having a greater ability to pay taxes than two people living alone with the same combined income. According to this view, therefore, imposing the same tax burden on a married couple as on two single individuals living apart results in a marriage subsidy or bonus. ANALYSIS OF THE INCOME TAX TREATMENT OF MARRIED AND SINGLE TAXPAYERS ------------------------------------------------------------ Letter :3 In the first 4 appendixes to this report, we discuss the 59 income tax provisions we have identified. The four appendixes group the provisions according to the general tax treatment of married and single taxpayers, and each appendix lists various provisions, describing how each provision operates, how it affects married taxpayers, and what potential marriage penalties and bonuses may arise through the operation of the provision. Appendix I describes nine income tax provisions, including two--on the tax rates and the standard deduction--which potentially affect most taxpayers. These nine provisions adjust the income levels and deduction amounts to account for joint and single income. However, the adjustments for married couples filing jointly are less than twice those allowed to a single person. Thus, the tax rate for single people in tax year 1995 was 28 percent for taxable income over $23,350, while married people are taxed at a rate of 28 percent when taxable income exceeds $39,000--less than twice the income level of the single taxpayer. Generally, all these provisions potentially could lead to either a marriage penalty or a marriage bonus, depending on the relative income of the two spouses. With the tax rates, for example, there would be a marriage penalty if each spouse earns $21,000--their joint taxable income of $42,000 would be taxed at a marginal rate of 28 percent, even though if each filed as single individuals their highest tax rate would be 15 percent. On the other hand, there would be a marriage bonus if one spouse earns $34,000 and the other spouse earns $2,000--the married couple would be taxed at a rate of 15 percent although the spouse with $34,000 in taxable income would have a marginal tax rate of 28 percent filing as an individual. Appendix II shows 15 income tax provisions that provide the same income or deduction level, whether the taxpayer is filing jointly as a married couple or as a single individual. For instance, the home mortgage interest deduction is limited to the interest on a mortgage balance not exceeding $1 million; this limit is the same for a married couple as for a single person. Overall, the tax treatment of married and single people in these provisions leads to a mixed impact on married taxpayers. These provisions produce both penalties and bonuses, depending on the individual circumstances. With the home mortgage interest deduction, for example, two married taxpayers may both own houses with mortgages of $600,000 each, for a combined mortgage of $1.2 million--over the $1 million limit. As a married couple, the taxpayers would not be able to deduct interest attributable to the mortgage amount over $1 million. As single taxpayers, though, each could deduct the interest on the two individual mortgages. However, suppose that one of the married taxpayers owns a home with a mortgage balance but has little or no income; in this case, the mortgage interest could be used to offset the other spouse's income, a tax advantage unavailable to two unmarried taxpayers. Appendix III examines nine provisions that provide full adjustment for joint and single income, either by treating married taxpayers as single taxpayers or allowing them twice the tax benefit allowed a single person. Thus, married taxpayers are each allowed to deduct the same personal exemption as a single person--$2,500 per spouse. For the most part, these provisions could only result in a tax bonus to the married couple. For example, even though one spouse has little or no income, a married couple would be eligible for two personal exemptions of $2,500, and both exemptions could be used to offset the income of the other spouse. Appendix IV describes 26 income tax provisions that treat married couples as a unique unit in the case of certain special situations between husband and wife. In one such provision, the law provides that a husband (or wife) cannot deduct losses on a sale of property to a spouse because they are considered "related parties." Technically, many of these provisions could create tax penalties for married couples. For instance, where the loss on the sale of property between two spouses is nondeductible, such a loss would be deductible in a sale involving an unmarried couple. On the other hand, some provisions, such as IRC section 7872 on below-market loans, free married people of the tax consequences of financial dealings between spouses. INSUFFICIENT DATA AVAILABLE TO MEASURE THE COMPARATIVE SIGNIFICANCE OF THE DIFFERENT TAX PENALTIES AND BONUSES CITED IN THIS REPORT ------------------------------------------------------------ Letter :4 We found that tax data, as currently reported by taxpayers and compiled by the Internal Revenue Service (IRS), did not contain data elements that would permit the identification of the numbers of people potentially affected by all the marriage penalties and bonuses described in this report. Such data would be necessary, for example, to rank the comparative significance of the individual provisions. Assessment of the numbers of taxpayers potentially affected by these penalties and bonuses would require identification of the married taxpayers whose individual tax situations include a marriage penalty or bonus. Information on numerous individual factors, the most important of which is division of income between spouses, would be critical to attribution of a specific penalty or bonus to a married couple. Current IRS tax data do not contain information on how income is split between spouses.\7 Even with information on how income is split between spouses, though, much other necessary information-- for example, the amount of a couple's home mortgage balance or which spouse owns assets resulting in capital gains or losses\8 --is not available. Although some studies\9 have been done making assumptions as to how to allocate certain common tax items, such as itemized deductions, other types of tax items, such as those identified above, would be difficult, at best, to estimate and allocate without further information. To add some perspective to the many different provisions we describe in this report, appendix V includes a list showing the numbers of married and single taxpayers filing under some of the provisions discussed herein; specifically, those provisions for which we could quantify the number of taxpayers filing using IRS' public tax files. However, these numbers do not in any way indicate the number of taxpayers actually affected by the marriage penalty or marriage bonus possible in application of the provision; as we have indicated above, other factors must be considered before it can be determined that an individual married couple is subject to a marriage penalty or bonus. -------------------- \7 At the current time, taxpayers do not generally report information on how income is split between spouses. The last time taxpayers reported such information was in tax year 1986 on Schedule W, Deduction for a Married Couple When Both Work. IRS is adding information on earned income and other types of income to its compilation of Statistics of Income tax data for tax year 1993; however, this information will not be available until, at the earliest, the beginning of next year. \8 A married couple may be penalized because the amount of mortgage interest deductible on a joint return is limited to that attributable to a mortgage balance of less than $1 million; although the tax return reports the total amount of interest deducted by the couple, it provides no information on the total amount of the mortgage held by the couple. Similarly, with capital gains and losses, the tax return does not provide information on which spouse owned the property sold for a capital gain or loss. \9 See, for example, Daniel R. Feenberg and Harvey S. Rosen, "Recent Developments in the Marriage Tax," National Tax Journal 48 No. 1 (March 1995): 91-101. In this article, the authors look at the marriage tax for three IRC sections--on the tax rates, the standard deduction, and the earned income credit. To calculate the marriage tax, they assumed that itemized deductions would be reported by the spouse with the higher income. OBJECTIVES, SCOPE, AND METHODOLOGY ------------------------------------------------------------ Letter :5 Our objectives were to (1) identify provisions in the income tax code that treat married and single taxpayers disparately, determining how each section operates, and how its treatment of taxpayers varies depending on marital status; (2) analyze each provision to determine whether the provision can create a marriage penalty or marriage bonus, or both; and (3) quantify, to the extent possible, the number of taxpayers potentially affected by marriage penalties or marriage bonuses. To identify the income tax code provisions, we conducted a computer search of the IRC using certain key words such as "joint," "married," and "spouse," and we examined the available literature on the subject. Through this research we also determined how each section operated, and how it dealt with married and single taxpayers. From this analysis, we identified whether the specific treatment of married and single taxpayers could lead to marriage penalties or bonuses. To determine the extent to which we could quantify the number of taxpayers potentially affected by marriage penalties and bonuses, we reviewed data available in IRS' public file on Statistics of Income, a compilation of tax data from a sample of individual tax returns. We also interviewed IRS staff responsible for research on individual returns. In addition, we researched the relevant literature to determine whether other theoretical models could provide sufficient information to estimate the numbers of taxpayers affected by IRC sections described in this report. We did our work in Washington, D.C. between March 1996 and July 1996 in accordance with generally accepted government auditing standards. AGENCY COMMENTS ------------------------------------------------------------ Letter :6 We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designated representative. At a meeting held August 2, 1996, representatives of the IRS Office of Chief Counsel suggested technical revisions to this report. We revised the report as suggested. ---------------------------------------------------------- Letter :6.1 We are sending copies of this report to the Chairmen and the Ranking Minority Members of the House Committee on Ways and Means, the Senate Committee on Finance, and various other congressional committees; the Secretary of the Treasury; the Commissioner of Internal Revenue; and other interested parties. Copies will be made available to others upon request. The major contributors to this report are listed in appendix VII. If you have any questions, please contact me on (202) 512-9044. Sincerely yours, Natwar M. Gandhi Associate Director, Tax Policy and Administration Issues MARRIAGE PENALTIES AND BONUSES ASSOCIATED WITH INCOME TAX PROVISIONS ALLOWING SOME ADJUSTMENT FOR JOINT AND SINGLE INCOME =========================================================== Appendix I In this appendix, we describe nine income tax provisions that have some type of tax adjustment (generally, a higher income limit) for the combined income of married taxpayers filing jointly relative to single taxpayers. The adjustments in this category, though, are always less than twice the limit allowed to single taxpayers. These sections include provisions that affect large numbers of taxpayers. For example, section 1 sets the rate schedules for all taxpayers, section 63 determines the standard deduction, and section 86 defines when social security benefits are taxable. Generally, all these sections have one pattern for a penalty and one for a bonus--both of which are derived from the relative incomes of the two spouses. A married couple may have a tax penalty if both spouses have relatively equal income--in that case, their combined income may put them into a higher rate bracket or give them a lower deduction, even though individually each taxpayer would have been eligible for a lower tax bracket or a larger deduction. However, where the husband and wife have larger disparities in individual income, the couple may get a marriage bonus--in this case, the spouse with the higher income may owe less in a joint return than if he or she were to file as a single taxpayer. To illustrate these tax penalties and bonuses, table I.1 shows how the tax rate under IRC section 1 affects the tax liabilities of two hypothetical married couples with the same household taxable income. For couple A, the husband and wife have the same taxable income while for couple B, the wife earns all the household income. To indicate a tax penalty or bonus, we compare the tax liability of these couples as joint filers with that of unmarried individuals. Table I.1 Comparison of How the 1995 Tax Rate Schedule Affects Two Married Couples Filing Jointly and as Singles Husband Wife Husband Wife ------------------------------ -------- -------- -------- -------- Income $30,000 $30,000 0 $60,000 Combined income $60,000 $60,000 Tax if filed jointly $8,503 $8,503 Tax if filed as single $3,580 $3,580 0 $11,980 Combined tax as singles $7,160 $11,980 Amount joint tax differs from $1,343 -$3,477 tax as singles Marriage penalty or bonus Penalty Bonus ---------------------------------------------------------------------- Source: GAO analysis of IRC section 1, assuming use of the standard deduction. As shown in table I.1, couple A are penalized $1,343 by filing a joint return because their combined income puts them in a higher tax bracket than if they were each taxed as single individuals. On the other hand, couple B receive a $3,477 tax bonus by being able to file a joint return because the wife's $60,000 income is taxed at a lower rate filing jointly than it would have been had she been allowed to file as a single individual. Table I.2 describes nine income tax provisions that have some type of tax adjustment. Table I.2 1995 Income Tax Provisions With Some Adjustment for Joint and Single Income Treatment of Code married Basis for section Description taxpayers penalty Basis for bonus -------- ---------------- ---------------- ---------------- ---------------- 1. Tax rates are Except for the Relatively equal Relatively Section set according to highest tax income between unequal income 1: Tax personal status: rate, the income two spouses-- between two Imposed married or level at which tax rate would spouses--tax on single. Income tax rates are be less if each rate would be Individu tax rates are increased is filed as single greater if filed als (tax progressively higher for than if filed as single than rates) increased at married couples jointly. if filed various income than single jointly. levels, people. However, depending on it is not twice personal status. the level of the The tax rates single income range from 15 level. Thus, the percent at the tax rate for lowest income married couples levels to 39.6 is increased percent at the from 15 to 28 highest income percent when levels. joint taxable income is over $39,000, while a single person pays 28 percent if taxable income is over $23,350. Married filing separately is taxed at 28 percent when taxable income is $19,500. At the highest income rate (39.6 percent), the income level of $256,500 is the same for both married couples filing jointly and single people. 2. If over 65 or The income Relatively equal Relatively Section disabled, levels at which income between unequal income 22: taxpayer is the credit is two spouses-- between two Credit eligible for reduced or credit would be spouses--credit for the credit of up to eliminated are greater if each would be less if Elderly $1,125 for higher for filed as single each filed as and the married couples married couples than if filed single than if Permanen and $750 for than single jointly. filed jointly. tly and singles. people, but not Totally However, the double. The Disabled amount of the credit for (elderly credit is married couples credit) reduced (and with both potentially spouses eligible eliminated) by is eliminated amounts one- when either tax- half of tax- free social free social security or security and other nontaxable pensions income is $7,500 received by the or more or AGI taxpayer, and by is $25,000 or amounts the more; for single taxpayer's people, the adjusted gross figures are income (AGI) $5,000 and exceeds certain $17,500, limits. respectively. A married couple must file jointly to get credit unless couple is legally separated or taxpayer qualifies as an "abandoned spouse."\a 3. Total amount of The operation of Relatively equal Relatively Section tax credits from this provision income between unequal income 38: 11 various is dependent on two spouses-- between two General business credits two other credit would be spouses--credit Business cannot exceed provisions, greater if each would be less if Credit either the section 55 on filed as single each filed as tentative the alternative than if filed single than if alternative minimum tax and jointly. filed jointly. minimum tax or section 1 on tax 25 percent of rates. For both regular tax these latter liability over provisions, the $25,000, income levels whichever is for the tax greater. rates are higher for married couples than single people, but not double. If married filing separately, level is one- half of married filing jointly unless one spouse has no credit or carryover or carryback of the credit. 4. Taxpayer who The income Relatively equal Relatively Section gets certain levels for the income between unequal income 55: special minimum tax are two spouses-- between two Alternat deductions and higher for a tax rate would spouses--tax ive credits may be married couple be less if each rate would be Minimum subject to an than a single filed as single greater if each Tax "alternative person, but not than if filed filed as single Imposed minimum tax" if double: married jointly. than if filed (alterna income exceeds people are taxed jointly. tive certain levels. if income is minimum over $45,000, tax) while single people are taxed if income is over $33,750. If married filing separately, level is $22,500. 5. Rather than The amount of Both spouses One spouse's Section itemize the deduction have income over income is less 63: individual for a married $6,400 and would than $6,400 and Taxable deductions, couple is higher elect to file the spouse would Income taxpayer can than for a individually not file Defined take "standard single person, with the individually. (standar deduction." The but not twice as standard d amount of the much: married, deduction. deductio deduction $6,550; single, n) depends on $3,900. If personal status. married filing separately, deduction is $3,275 and the other spouse may not itemize. 6. Social security Threshold limits One spouse's Relatively Section income may be at which social taxable income unequal income 86: taxed if security is may require between two Social taxpayer has taxed are higher other spouse's spouses--tax on Security other types of for a married social security individual and Tier income. To be couple than a benefits to be benefits would I taxed, the sum single person, taxed. be more than tax Railroad of the other but not double: on combined Retireme income plus one- if married, up income. nt half of social to 50 percent of Benefits security benefits will be (social benefits must taxed if security exceed certain threshold benefits limits. exceeds $32,000, ) while if single, $25,000. If married filing separately, any other income will result in taxable social security, unless legally separated, or an abandoned spouse, or live apart from spouse the entire year. 7. Taxpayer who The limits at Relatively equal Relatively Section redeems U.S. which the income between unequal income 135: savings bonds to exclusion is spouses-- between spouses- Income pay college phased out are exclusion would -exclusion would from expenses can higher for a be greater if be less if filed U.S. exclude from married couple filed individually Savings income the than a single individually than if filed Bonds amount of person, but not than if filed jointly. Used to interest earned double: for jointly. Pay on the bonds. married couple, Higher The exclusion is phased out if Educatio phased out when modified AGI is n the taxpayer's $63,450 and Tuition modified AGI eliminated at and Fees exceeds certain $93,450; for (savings limits. single, the bonds figures are for $42,300 and educatio $57,300, n) respectively. Married person (unless "abandoned spouse") cannot qualify unless files jointly or is legally separated. 8. Taxpayer can The deduction Relatively equal Relatively Section deduct $2,500 begins to be income between unequal income 151(d)(3 for each phased out at spouses-- between spouses- ): personal higher AGI for exemptions would -exemption for Phaseout exemption--for married couple not be phased higher-income of taxpayer, than single out if each spouse would be Allowanc spouse, person, but not filed phased out if e of dependents. The double: if individually. each filed as Deductio deduction is married, over single rather ns for phased out if $172,050; if than as married. Personal AGI is above single, over Exemptio certain limits. $114,700. If ns married filing (persona separately, l deductions exemptio phased out over n $86,025. phaseout ) 9. Taxpayer can The deduction Relatively equal Relatively Section deduct up to begins to be income between unequal income 219(g): $2,000 per year phased out at spouses-- between spouses- Retireme in tax-free higher AGI if deduction would -deduction would nt individual filing joint not be phased be phased out if Savings retirement return than out if each each filed as (individ account (IRA). filing as single filed single rather ual However, if also person, but not individually. than as married. retireme in employer double the nt pension plan, amount of the account deduction is single taxpayer: with reduced over if married, employer certain modified phased out plan) AGI levels. beginning at modified AGI over $40,000; if single, beginning at modified AGI over $25,000. If married filing separately, will be phased out when AGI exceeds zero, unless the married couple lives apart for whole year. -------------------------------------------------------------------------------- \a See footnote 1 on page 1. A taxpayer who qualifies as an "abandoned spouse" is not considered married for the purposes of the IRC. Such a taxpayer may file as a single person or as a head of household. This option is applicable for all code sections discussed in this report. Source: GAO's analysis of IRC provisions. MARRIAGE PENALTIES AND BONUSES ASSOCIATED WITH INCOME TAX PROVISIONS THAT MAKE NO ADJUSTMENT FOR JOINT AND SINGLE INCOME ========================================================== Appendix II In this appendix, we describe 15 income tax provisions that each allow some type of tax benefit--a credit, a deduction or an exclusion--which is limited either in the amount of the benefit or by the amount of total taxpayer income. For all these provisions, the benefit and income limits are the same whether for two married taxpayers or for one single taxpayer. Each of these provisions offers the possibility of tax penalties to married couples and, generally, there are two patterns of potential marriage penalties. First, there would be a penalty when the joint income exceeds the limit for the tax benefit, even though individually one or both of the spouses could qualify for the benefit. As an example, consider a husband and wife who each earn $14,000, for a combined adjusted gross income (AGI) of $28,000. Because IRC section 32 on the earned income credit limits the earned income credit for 1995 to those taxpayers--married or single--with an AGI less than $26,673, the couple would be ineligible for the credit. However, if each had filed as a single taxpayer, both may have qualified for the credit. Another type of penalty is possible where the tax benefit is limited to one amount--for either a married or single taxpayer--and the married couple would have reported more than that amount if they had each filed as single taxpayers. For instance, if two taxpayers each have $3,000 in capital losses, for a total of $6,000 in losses, the deduction limit of $3,000 in IRC section 1211 imposes a tax penalty on a married couple. However, nine of these provisions, including IRC section 1211 on capital losses, offer possible tax advantages to a married couple that are unavailable to two similarly situated single people. With joint returns, taxpayers could pool their income and deductions, using any available deductions to offset their combined income. Thus, where one spouse has a deduction (or a loss), that amount could be applied to reduce the income (or gains) of the other spouse. Table II.1 shows the tax consequences of the marriage penalties and bonuses related to section 1211 on capital losses. Couple A is a hypothetical married couple where each spouse has sold property, each losing $8,000 in long-term capital losses. With couple B, though, the wife has incurred a long-term capital loss of $8,000 but the husband has sold property for a long-term capital gain of $8,000. Table II.1 Comparison of 1995 Tax Liability Involving Capital Losses and Gains of Two Married Couples Filing Jointly and as Singles Husband Wife Husband Wife ------------------------------ -------- -------- -------- -------- Taxable income (before capital $30,000 $30,000 $30,000 $30,000 gains or losses) Capital gains (or losses) ($8,000) ($8,000) $8,000 ($8,000) Capital loss deduction if ($3,000) 0 filed jointly ($3,000 maximum) Tax if filed jointly $10,897 $11,737 Capital gains (or losses) if ($3,000) ($3,000) $8,000 ($3,000) file as singles ($3,000 maximum loss deduction) Tax if filed as single $4,532 $4,532 $7,612 $4,532 Combined tax as singles $9,064 $12,144 Amount joint tax differs from $1,833 -$407 tax as singles Marriage penalty or bonus Penalty Bonus ---------------------------------------------------------------------- Source: GAO analysis of IRC section 1211. As can be seen in table II.1, couple A's tax liability as a married couple is $1,833 greater than their liability had they filed as singles. As single taxpayers, they could deduct $6,000 in capital losses, while they could deduct only $3,000 as a married couple. Couple B, though, received a tax bonus when they filed jointly. As married taxpayers filing jointly, they could use the wife's capital loss to offset the husband's gain. As single taxpayers, however, the husband would have had to report the full $8,000 as capital gain, and the wife could have deducted only $3,000 of her capital losses from ordinary income. Table II.2 describes 15 income tax provisions that allow some type of tax benefit. Table II.2 1995 Income Tax Provisions With No Adjustment for Joint and Single Income Treatment of Code married Basis for section Description taxpayers penalty Basis for bonus -------- ---------------- ---------------- ---------------- ---------------- 1. Taxpayer who Income limits The combined Full-time Section maintains more are the same for income of both student without 21: than 50 percent a married couple spouses may earned income Expenses of household as for a single reduce credit, but otherwise for expenses is person. A even though eligible for the Househol allowed a credit married couple individually one credit, will be d and for child-care must file or both spouses able to take Dependen expenses of up jointly to get may be eligible credit if t Care to $720 for one credit, unless for larger married. Services child, $1,440 taxpayer is credit. Necessar for two or more. legally y for Credit is for separated or Gainful 20-30 percent of qualifies as an Employme expenses, abandoned nt depending on spouse. Unless (child- AGI, but cannot one spouse is a care exceed full-time credit) taxpayer's student, both earned income. spouses must The reduction of work, and credit the percentage cannot exceed begins at AGI in either spouse's excess of earned income. $10,000 and ends If spouse is a at AGI over full-time $28,000. student, the spouse is considered to earn $200 per month. 2. Low-income Income limits The combined Person with no Section taxpayer with are the same for income of both children but 32: earned income a married couple spouses may with income less Earned allowed credit. as for a single reduce or than limit Income With two person. A eliminate marries person Credit children, credit married couple credit, even with children up to $3,110, generally must though and little or no but eliminated file jointly to individually one earned income. if AGI greater get credit, or both spouses than $26,673. unless taxpayer may be eligible With no qualifies as an for larger children, abandoned credit. allowed up to spouse. $314, but eliminated at AGI of $9,230. 3. Performing Income limits The combined Married couples Section artists whose are the same for income of both can pool income 62(b)(2) AGI without a married couple spouses may and deductions- : regard to this as for a single eliminate -spouse eligible Certain deduction is person. A deduction, even for deduction Trade $16,000 or less married couple though has little or no and may deduct must file a individually one income. Business certain business joint return, or both spouses Expenses expenses to unless taxpayer may be eligible. of determine AGI, lived apart from Qualifie rather than as a spouse for d miscellaneous entire year or Performi itemized qualifies as an ng business abandoned Artist deduction. spouse. (perform ing artist expense) 4. If AGI exceeds Income limits The combined None Section $114,700, are the same for income of both 68: certain itemized a married couple spouses may Overall deductions (not as for a single require Limitati medical, person. If reduction in on on investment married couple deductions, even Itemized interest, elect to file though Deductio casualty loss, separately, individually one ns or gambling limit is or both spouses (itemize loss) are $57,350. would not be d reduced. required to deductio reduce n limit) deductions. 5. Taxpayer over 55 Exclusion amount Two unmarried None Section who sells is the same for taxpayers would 121: principal married couple be eligible for One- residence may as for single twice the amount Time exclude up to person. Married of the total Exclusio $125,000 in gain couples must exclusion. n of from the sale. jointly elect to Gain Taxpayer may exclude the gain from elect to exclude whether filing Sale of gain only once jointly or Principa during lifetime. separately. Once l having elected Residenc to exclude gain, e by must jointly Individu revoke to al Who revise. Married Has filing Attained separately may Age 55 exclude up to (one- $62,500. time resident ial sale exclusio n) 6. Taxpayer can Limit on Two unmarried None Section exclude employer exclusion is the taxpayers would 129: benefits for same for married be eligible for Dependen child-care, up couple or single twice the amount t Care to either $5,000 person. Married of the total Assistan or the amount of couple is exclusion. ce earned income, limited to the Programs whichever is smaller amount (employe smaller. of earned income r child- by either care spouse, and if benefits filed ) separately, total exclusion cannot exceed $2,500. 7. Taxpayer can Limit on Two unmarried Married couple Section deduct interest mortgage taxpayers would can pool income 163(h)(3 costs on principal is be eligible for and deductions- ): mortgages from same for married twice the amount -spouse with Qualifie one or two couple or single of the total deduction has d residences and person. If deduction. less income than Residenc on home equity married couple deduction e debt. The files amount. Interest mortgage balance separately, loan (mortgag cannot exceed $1 limits are e million, and the reduced to interest amount of the $500,000 for deductio home equity loan mortgage and n) cannot exceed $50,000 for home $100,000. equity, and each spouse can only deduct interest from one residence unless other spouse consents in writing. 8. Taxpayer can Limit on loss Two unmarried Married couple Section deduct losses of deduction is taxpayers would can split 165(l): uninsured same for married be eligible for deductions-- Losses financial couple as for twice the amount spouse with in deposits as a single person. of the total lower income can Insolven miscellaneous If married deduction. file separately t itemized filing to meet AGI Financia deduction, to separately, the percentage. l the extent that limit is reduced Institut losses are over to $10,000, with ions 2 percent of respect to each (uninsur AGI, up to financial ed $20,000, with institution. financia respect to each l financial deposit institution. loss) 9. The cost of Limit on Two unmarried Married couple Section certain tangible deduction is taxpayers would can pool income 179: personal same for married be eligible for and deductions- Election property used couple or single twice the amount -spouse with to over 50 percent person. If of the total deduction has Expense for business can married filing deduction. less income than Certain be treated as separately, the deduction Business expense and limit would be amount. Assets immediately automatically (section deducted. The divided between 179 deduction is the spouses, assets) limited to unless otherwise $17,500. agreed. 10. Certain costs of Limit on Two unmarried Married couple Section maintaining deduction is taxpayers would can pool income 194: timber property same for married be eligible for and deductions- Amortiza can be amortized couple or single twice the amount -spouse with tion of over 7-year person. If of the total deduction has Reforest period. However, married couple deduction. less income than ation taxpayer is files deduction Expenses limited to separately, amount. (refores $10,000 per limit is reduced tation year. to $5,000. deductio n) 11. Taxpayer can Deduction Two unmarried Married couple Section deduct losses amounts and AGI taxpayers would can pool passive 469: from rental real limits are the be eligible for gains and Passive estate against same for married twice the amount losses--loss Activity ordinary income couple as for of the total from one spouse Losses only if taxpayer single person. loss; also, will offset gain and is "active However, married combined income, from other Credits participant." filing but not spouse; also, Limited Deduction is separately individual generally can (passive limited to cannot take income, reduces pool income and activity $25,000 per deduction if the or eliminates deductions-- loss) year, and is spouses lived amount of loss spouse with reduced if AGI together any deduction. deduction has exceeds $100,000 time during the less income than and eliminated tax year. If deduction if AGI is over lived apart the amount. $150,000. Excess entire year, losses can be deduction deferred to limited to future years. $12,500, reduced if AGI is over $50,000, and eliminated if AGI is over $75,000. 12. Taxpayer can Limits are same Two unmarried None Section elect to roll for married taxpayers would 1044. over gain from couple as for be eligible for Rollover sale of public single person. twice the amount of stock if gain is If married of the rollover Publicly reinvested in a couple files gain. Traded small business separately, Securiti licensed by the rollover amount es Gain Small Business is limited to into Administration. $25,000, or Speciali The tax basis of $250,000 reduced zed the small by amount Small business stock previously Business (which is used rolled over, Investme to calculate whichever is nt gain or loss on smaller. Companie a later sale of s (small that stock) is business reduced by the rollover rolled over ) gain. Limit on rollover is $50,000 a year, or $500,000 reduced by amount previously rolled over, whichever is smaller. 13. Beginning in Exclusion limit Two unmarried None Section 1998, a taxpayer is same whether taxpayers would 1202: can exclude 50 for married be eligible for 50 percent of the couple or single twice the amount Percent gain from sale person. If of the total Exclusio of stock in married couple exclusion. n for qualified small files Gain business if separately, from purchased at its taxpayer is Certain original issue limited to $5 Small and held for 5 million reduced Business years. Gain is by amounts Stock limited to $10 previously (small million reduced excluded or 10 business by amounts times the stock previously taxpayer's basis exclusio excluded or 10 in the business, n) times the whichever is taxpayer's basis greater. in the business, whichever is greater. 14. Taxpayer can Deduction limit Two unmarried Married couple Section deduct a net is same for taxpayers would can pool capital 1211: capital loss of married couple be eligible for gains and Limitati $3,000 against or single twice the amount losses--loss ons on ordinary income. person. If of the total from one spouse Capital Excess over married couple loss. can offset gain Losses $3,000 can be filing from other (capital carried forward separately, spouse. loss) into future annual deduction years. is limited to $1,500. 15. If estimated AGI limit is Combined spousal None Section quarterly same for married income, but not 6654: payments are couple as for individual Failure based on last single person. income, by year's tax, If married increases amount Individu taxpayer with couple files of estimated tax al to AGI under separately, must to be paid Pay $150,000 must pay quarterly 25 quarterly. Estimate pay quarterly 25 percent of last d Income percent of 100 year's tax if Tax percent of last AGI is $75,000 (estimat year's tax. If or less. If AGI ed AGI is over is over $75,000, income $150,000, taxpayer must tax) taxpayer must pay quarterly 25 pay quarterly 25 percent of 110 percent of 110 percent of last percent of last year's tax. year's tax. -------------------------------------------------------------------------------- Source: GAO's analysis of IRC provisions. MARRIAGE PENALTIES AND BONUSES ASSOCIATED WITH INCOME TAX PROVISIONS THAT FULLY ADJUST FOR JOINT AND SINGLE INCOME ========================================================= Appendix III The nine IRC provisions described below fully adjust for joint and single income. The operations of these tax provisions are widely different. Some of these provisions effectively treat married taxpayers the same as if they were single people. IRC section 6017, for example, requires that self- employment tax be calculated separately on each spouse's individual self- employment income. Section 213 allows a married taxpayer filing separately to report medical deductions with the same limitations allowed a single taxpayer. Other sections allow a married couple twice the benefit allowed a single person. Thus, section 1244 permits married couples to deduct $100,000 in losses, while a single person is limited to $50,000. For the most part, these sections can only result in the same, or less, tax liability for married taxpayers than for single people. Thus, the self- employment tax assessed on two married people should always be the same as that assessed for a similarly situated unmarried couple. Three sections-- section 213 on medical deductions, section 165 on nonbusiness losses, and section 172 on net operating losses--require that married taxpayers file separately to take full advantage of the tax bonuses possible for a married couple. When married taxpayers file separately, many tax provisions reduce or eliminate the tax benefits available to the taxpayer. To take full advantage of these three sections, therefore, a married taxpayer may have to forgo other possible tax benefits, leading to a possible tax penalty. We illustrate the impact of a tax provision that allows married taxpayers twice the benefit provided to single people in table III.1 below. In this table, we show how income tax section 1244, which allows married taxpayers to deduct up to $100,000 on the sale of certain small business stocks, would affect two married couples filing jointly and as singles. Each spouse in couple A holds $50,000 in small business stock losses, while for couple B, the husband has incurred $100,000 in losses by himself. Table III.1 Comparison of How Section 1244 Loss Deductions Affect Two Married Couples Filing Jointly and as Singles in 1995 Husband Wife Husband Wife ------------------------------ -------- -------- -------- -------- Taxable income (before 1244 $60,000 $60,000 $60,000 $60,000 losses) 1244 losses $50,000 $50,000 $100,000 0 1244 loss deduction if filed $100,000 $100,000 jointly ($100,000 is maximum loss) Tax if filed jointly $3,004 $3,004 1244 loss deduction if filed $50,000 $50,000 $50,000 0 as single ($50,000 is maximum loss) Tax if filed as single $1,504 $1,504 $1,054 $13,876 Combined tax as singles $3,008 $14,930 Amount joint tax differs from -$4 - tax as singles $11,926 Marriage penalty or bonus Bonus Bonus ---------------------------------------------------------------------- Source: GAO analysis of IRC section 1244. As shown in table III.1, couple A's tax liability is nearly the same whether the couple files jointly or as single individuals. In each case, both spouses could deduct the full amount of their individual section 1244 losses. Couple B, on the other hand, received an $11,926 tax bonus by filing jointly because the husband's entire loss (which is twice that allowed a single person) can be applied to offset his wife's income. Table III.2 describes nine tax provisions that fully adjust for joint and single income. Table III.2 1995 Income Tax Provisions With Full Adjustment for Joint and Single Income Treatment of Code married Basis for section Description taxpayers penalty Basis for bonus -------- ---------------- ---------------- ---------------- ---------------- 1. Taxpayer is Each married None Exemption amount Section allowed to taxpayer is for one spouse 151: deduct $2,500 as allowed same with little or Allowanc "personal exemption amount no income can be e of exemption." as a single used to offset Deductio Personal taxpayer; each larger income of n for exemption also spouse is other spouse. Personal allowed for allowed to Exemptio spouse and all deduct $2,500. ns dependents. (persona l exemptio ns) 2. Taxpayer can Married To take full Married Section deduct certain taxpayers and advantage of taxpayers can 165: nonbusiness single taxpayers possible file separately Losses losses: casualty are treated the marriage bonus to reduce AGI (casualt losses, to the same--married related to levels; can also y and extent that each taxpayers can casualty loss, pool gains and gambling loss is over file separately spouses must losses. losses) $100 and the net to reduce AGI file separate casualty loss levels. Married returns. exceeds 10 taxpayers are Separate returns percent of AGI; subject to same would, in many and gambling limits whether instances, losses, up to filing jointly reduce or amount of or separately. eliminate other gambling wins. tax benefits available to the taxpayer. 3. In cases where Married To take full Married Section casualty or taxpayers and advantage of taxpayers can 172: Net theft losses single taxpayers possible file separately Operatin exceed total are treated the marriage bonus, to reduce AGI g Loss income, the same--married spouses must levels; can also taxpayer may taxpayers can file separate pool gains and have a "net file separately returns. losses. operating loss." to reduce income Separate returns In this case, level. Married would, in many the taxpayer can taxpayers are instances, deduct amount subject to same reduce or against taxes in limits whether eliminate other either prior or filing jointly tax benefits future years. or separately. available to the taxpayer. 4. Taxpayer can Married To take full Married Section deduct medical taxpayers and advantage of taxpayers can 213: expenses to the single taxpayers possible file separately Medical, extent that the are treated the marriage bonus, to reduce AGI Dental, expenses exceed same--married spouses must levels; one Etc., 7.5 percent of taxpayers can file separate spouse can also Expenses AGI. Taxpayer file separately returns. deduct expenses (medical can also deduct to reduce income Separate returns paid for medical expenses medical expenses level. Married would, in many costs of other ) for spouse and taxpayers are instances, spouse. dependents. subject to same reduce or limits whether eliminate other filing jointly tax benefits or separately. available to the taxpayer. 5. If taxpayer is IRA deduction None "Special IRA" Section not covered by for two married allows a larger 219: an employer taxpayers IRA deduction to Retireme pension plan, calculated married taxpayer nt taxpayer can exactly same as whose spouse has Savings deduct up to single very little or (IRA $2,000 per year, taxpayers. no income. with no limited to However, if one employer amount of earned spouse's income plan and income. is less than special $250, other IRA) spouse can deduct up to $2,250 for both. 6. Taxpayer who Married None None Section sells old home taxpayers 1034: and buys new allocate the Rollover home costing at rollover of gain of Gain least as much as on sale of a on Sale the old home residence, of must roll over without regard Principa gain on sale by to who owned the l applying the old home or who Residenc amount of the bought the new e gain to reduce home, if both (residen the basis of the meet certain ce new home. The requirements. rollover tax basis of the ) new home is reduced by the gain. Can only be used once every 2 years. 7. Taxpayer can For married None One married Section deduct loss from couples, the taxpayer can 1244: sale or exchange deduction limit deduct up to Losses of certain small is twice that twice as much as in Small business stocks allowed single single taxpayer. Business against ordinary taxpayers-- Stock income, limited $100,000 if to $50,000 per married filing year. jointly. 8. Every taxpayer Married None None Section with self- taxpayers 6017: employment calculate self- Self- income over $400 employment tax Employme must file a exactly as if nt Tax return and they were two Returns report on self- single (self- employment tax. taxpayers--tax employme is computed on nt tax) separate earnings of each spouse. The amount reported on the joint return is the sum of the two taxes. 9. Every taxpayer Married None None Section may designate taxpayers 6096: that $3 be paid treated as if Designat to the they are two ion by Presidential single Individu Election taxpayers--each als Campaign Fund. spouse may (preside designate $3 to ntial campaign fund. campaign ) -------------------------------------------------------------------------------- Source: GAO's analysis of IRC provisions. MARRIAGE PENALTIES AND BONUSES ASSOCIATED WITH INCOME TAX PROVISIONS THAT TREAT MARRIED TAXPAYERS AS SPECIAL UNIT ========================================================== Appendix IV Table IV.1 describes the operations of 26 IRC sections that treat married taxpayers as unique units. For the most part, these sections relate to special situations between spouses--for example, loans or sales between husband and wife. The purpose of many of these provisions was to regulate sham transactions in commercial ventures. For example, IRC section 1092 taxes "straddles"-- business investments in which the taxpayer buys two interests in property, each of which offsets the other. Under the current tax law, the investor cannot recognize the loss in one interest without realizing the gain in the offsetting investment. To identify a straddle position, any property purchased by a wife that offsets property previously purchased by her husband is considered to be owned by the husband. Under certain circumstances, this provision could create a tax penalty, where, for instance, both husband and wife are independent investors. In that case, the married couple might incur a greater tax liability than a similarly situated unmarried couple. Table IV.1 1995 Income Tax Provisions Treating Married Taxpayers as Special Unit Treatment of Code married Basis for section Description taxpayers penalty Basis for bonus -------- ---------------- ---------------- ---------------- ---------------- 1. Child under 14 If married Even if child's None Section will be taxed at parents file custodial parent 1(g): parent's highest separately, files Certain marginal rate. child is taxed separately, the Unearned at the rate of child's unearned Income the parent with income is taxed of Minor the highest based on the Children income. rate of the Taxed as parent with the if highest income. Parent's Income (kiddies tax) 2. Tax credit for Certain If husband and None Section investment in partnerships wife are in a 42: Low- low-income with 35 or more partnership Income housing project. partners are dealing with Housing Credit must be treated as one low-income Credit recaptured if taxpayer for the housing unit, project fails to purpose of they will not be meet program recapture unless considered requirements. partnership independent elects not to be investors for so treated; a purpose of husband and wife determining are considered whether one partner of partnership is such a to be treated as partnership. one unit for purpose of recapture. 3. A married Where married If unmarried, None Section individual taxpayers file two taxpayers 63(c)(6) filing a separately, both could determine : separate return spouses must individually Certain is not eligible either itemize whether to Individu for a standard their deductions itemize or use als Not deduction if or elect to take the standard Eligible spouse itemizes the standard deduction. for deductions. deduction. Standard Deductio n (electio n to itemize) 4. A taxpayer need The spouse of a Two taxpayers, None Section not include any "highly who are neither 125: amount in income compensated" married to each Cafeteri solely because, employee may other nor is one a Plans as an employee, have to include a dependent of the taxpayer may income the other, would choose among attributable to not be affected different a choice of by this compensation benefits if he provision. benefits, unless or she is also a the taxpayer can participant in be considered a the compensation "highly plan. compensated" employee. 5. Where a holder If the bond Two unrelated None Section of a private holder's spouse taxpayers who 147(a): activity bond is is a are not married Substant a "substantial "substantial to each other ial User user" of the user" of the would each be Requirem local facilities facilities able to use ent of financed by the financed by the private activity Certain bond, the bond bond, the bond facility without Private is not eligible is not qualified affecting the Activity for tax-exempt for tax-exempt tax status of Bonds status. Any status. the other. (private interest earned activity from the bond user) must be included in income. 6. Private activity Any prior Two unrelated None Section bond is not ownership of a taxpayers who 147(c)(2 qualified for farm, or receipt are not married ): tax-exempt of financing, by to each other Limitati status if 25 the first-time would not be on of percent of the farmer's spouse affected by this Use of proceeds are to will be imputed provision and Certain be used to buy to the farmer. neither would be Private land except if bound by the Activity land purchase is prior history of Bonds for the use of a the other. for Land "first-time Acquisit farmer." First- ion time farmer must (private have never activity previously owned first- a farm and must time not have farmer) received over $250,000 in financing. 7. Self-employed Taxpayer can None If unmarried, Section taxpayer can deduct costs of taxpayer cannot 162(l)(1 deduct up to 30 health insurance deduct costs of ): percent of for spouse and medical Special health insurance dependents. insurance of Rules costs. another person for who is not a Health dependent. Insuranc e Cost of Self- Employed Individu als (self- employed health insuranc e) 8. Taxpayer can Taxpayer bound Two unrelated None Section elect to deduct by deduction taxpayers who 263A(e)( costs of certain elected by are not married 2): plants used on spouse. to each other Exceptio farm. would not be n to affected by this Capitali provision, and zation neither would be Requirem bound by the ents for prior deductions Farming elected by the Business other. es (farm deductio n) 9. No deduction is Married Two unrelated None Section allowed for loss taxpayers cannot taxpayers who 267: from sale or deduct losses are not married Losses, exchange of from to each other Expenses property between transactions can deduct and "related between spouses. losses from a Interest parties." sale of property with Related parties between them. Respect includes spouse. to Transact ions between Related Parties (related party losses) 10. For purposes of Ownership of Two unrelated None Section certain stock by the taxpayers who 318: corporate taxpayer's are not married Construc distributions spouse will be to each other tive and adjustments, imputed to the would not be Ownershi the taxpayer taxpayer. affected by this p of will be provision, and Stock considered to ownership of (corpora own stock owned stock by one te by members of would not be ownershi the taxpayer's attributed to p in family. the other. distribu tions); also sections 302, 304 11. Gain from the Ownership of Two unrelated None Section sale, exchange, stock by the taxpayers who 341: or distribution taxpayer's are not married Collapsi of a collapsible spouse will be to each other ble corporation is imputed to the would not be Corporat ordinary income. taxpayer. affected by this ions provision, and ownership of stock by one would not be attributed to the other. 12. Stock options or For the purpose Two unrelated None Section employee stock of the taxpayers who 424(d): purchase plans limitation on are not married Attribut provided to the tax-free to each other ion of employee are not provision, would not be Stock immediately ownership of affected by this Ownershi taxable to the stock by the provision, and p employee unless taxpayer's ownership of (employe the employee spouse will be stock by one e stock owns certain imputed to the would not be options) amount of the taxpayer. attributed to ; also company's stock. the other. sections 422, 423 13. An additional For the purposes Two unrelated None Section tax will be of the number of taxpayers who 544: imposed on shareholders, are not married Stock certain ownership of to each other Ownershi undistributed stock by the would not be p in income in a taxpayer's affected by this Personal personal holding spouse will be provision, and Holding company. To be a imputed to the ownership of Companie "personal taxpayer. stock by one s holding company" would not be (persona there must be attributed to l five or fewer the other. holding shareholders and companie 60 percent of s); also the company's sections income must be 542, 543 specified types of income. 14. Independent The oil and gas Two unrelated None Section producers and holdings of the taxpayers who 613(A)(c royalty owners taxpayer, the are not married ): are allowed to taxpayer's to each other Exemptio use the spouse, and would not be n of percentage other members of affected by this Percenta depletion method the taxpayer's provision, and ge to account for family are holdings of one Depletio dwindling oil treated as if would not be n and gas held by one attributed to Limitati reserves. taxpayer. the other. on for However, Independ percentage ent depletion is Producer limited to a s and production of Royalty 1,000 barrels Owners per day. of Oil and Gas Wells (percent age depletio n) 15. Trust income A grantor/ Two unrelated None Section will be income taxpayer's taxpayers who 672: to the grantor spouse is are not married Related to the extent presumed to be a to each other or that the grantor "subordinate would not be Subordin has power to party" to the affected by this ate control the use grantor, and not provision, and Party to of the trust an independent one taxpayer Grantor assets. If power trustee for could act as of Trust over the trust control of the independent (trust is exercised by trust assets. trustee for the income); an independent The grantor is other. also trustee, the also treated as sections grantor will not holding any 674, be treated as power or 675, 677 the owner. interest of the grantor's spouse. 16. An interest in Taxpayer/ Sale of None Section partnership seller's family partnership 704(e): purchased by one includes spouse, interest between Partner' member of a ancestors, and two unrelated s family from lineal taxpayers not Distribu another is descendants. married to each tive treated as a other would not Share of gift from the be considered a Family seller and the gift. Partners fair market hip value of the (family purchased partners interest will be hip) considered donated capital. 17. A taxpayer The housing None If unmarried, Section living abroad expenses taxpayer could 911: can elect to excluded from not include Citizens exclude from gross income housing expenses or gross income a include those of another Resident certain amount paid or incurred person into s of the related to the for the housing cost U.S. costs of foreign taxpayer's exclusion. Living housing. spouse and Abroad dependents. (foreign housing allowanc e) 18. A taxpayer with To the extent Between an None Section offsetting that the unmarried 1092: investment taxpayer's couple, the Straddle positions spouse holds an assets of one s ("straddles") investment taxpayer would cannot recognize position that not be loss on these offsets that of attributed to investments the taxpayer, the other. until the gain the spouse's is realized. investment position will be attributed to the taxpayer. 19. Tax treatment of For purposes of If a couple is None Section gain or loss gain and loss on not married to 1233: from short sale short sales, each other, the Gains of property investments of assets of one and depends upon either spouse taxpayer will Losses whether the are attributed not be from property used to to the other attributed to Short close the sale spouse. the other. Sales was a capital (short asset. sales) 20. Sale or exchange Any transfer of If taxpayers None Section of a patent is a patent between unmarried to 1235: considered sale husband and wife each other Sale or of a long-term will not be engage in sale Exchange capital asset, considered sale of patent, the of unless transfer of a long-term sale will be Patents is between capital asset. considered that (patents related parties. of a long-term ) capital asset. 21. Gain from sale Gains on sale Two unrelated None Section of depreciable between husband taxpayers who 1239: property between and wife of are not married Gain related parties depreciable to each other from is considered property is can treat gains Sale of ordinary income. treated as on sale of Deprecia ordinary income. property between ble them as capital Property gains. between Certain Related Taxpayer s (related party gains) 22. Gain or loss The interest of Two taxpayers None Section from contracts a spouse who who are not 1256(e): deemed section actively married to each Mark to 1256 contracts participates in other would not Market shall be treated management will be affected by Not to as 40 percent not be treated this provision. Apply to short-term gain as held by a Hedging or loss and 60 limited partner Transact percent long- or limited ions term gain or entrepreneur. (hedging loss. transact ions) 23.. Discount on In considering None Married persons Section issuance of the personal can make loans 1272: certain bond or loan exception, between one Current other debt husband and wife another without Inclusio instrument must are treated as tax n in be included in one person. consequences. Income income as it of accrues (it is Original considered a Issue form of Discount interest). (origina However, this l income will not apply discount if it is a loan ) between two people, neither in business to make loans, and the loan is less than $10,000. 24. To qualify as an For the purposes None If both spouses Section "S" corporation, of counting own S 1361: S a business shareholders, corporation, Corporat cannot have more husband and wife only one will ion than 35 are treated as count toward Defined shareholders. one person. limit on number of S corporation owners. 25. Taxpayer has For the purpose Two unrelated None Section certain limits of determining taxpayers who 1563: on multiple tax whether entity are not married Controll benefits if is controlled to each other ed Group associated with group would not be Corporat certain corporation, affected by this ion controlled spouse's stock provision, and corporations. holdings are assets of one attributed to would not be the taxpayer. attributed to the other. 26. If below-market Husband and wife None Married persons Section interest rate on are treated as can make loans 7872: loan, IRS can one person. between one Treatmen impute interest another without t of income to the tax Loans lender and consequences. with interest expense Below- to the borrower. Market Interest Rates (below- market loans) -------------------------------------------------------------------------------- Source: GAO's analysis of IRC provisions. NUMBER OF TAXPAYERS FILING UNDER CERTAIN PROVISIONS CITED IN THIS REPORT =========================================================== Appendix V We compiled, from data in IRS' 1992 Individual Public Use Tax File for Statistics of Income, table V.1 showing the number of taxpayers who filed under various provisions described elsewhere in this report. The provisions included in this table are only those provisions for which such information is available in IRS' public tax file.\10 In addition to the number of taxpayers filing under each provision, by filing status, we have also included (in the last column) a cross-reference to the table where the provision has been described in this report. Table V.1 Numbers of Taxpayers Filing in 1992 Under Specific Provisions Cited in This Report (Millions) In co me ta x Cross- pr Single Single reference ov Married Married taxpayers taxpayers to table is taxpayers taxpayers filing filing as where io All filing filing individuall head of provision n taxpayers jointly separately y household described -- ----------- ----------- ----------- ----------- ----------- ----------- Se 113.60 48.02 2.46 48.58 14.45 Table I.2 c (1) t i o n 1 : f i l i n g s t a t u s o f t a x p a y e r s Se 104.31 48.02 2.44 39.30 14.54 Table III.2 c (1) t i o n 1 5 1 : p e r s o n a l e x e m p t i o n Se 80.07 25.15 1.53 40.92 12.47 Table I.2 c (5) t i o n 6 3 : s t a n d a r d d e d u c t i o n Se 26.98 20.00 0.62 4.65 1.71 Table II.2 c (7) t i o n 1 6 3 ( h ) ( 3 ) : h o m e m o r t g a g e i n t e r e s t d e d u c t i o n Se 23.31 10.02 0.40 9.40 3.50 Table III.2 c (9) t i o n 6 0 9 6 : p r e s i d e n t i a l c a m p a i g n Se 14.10 4.93 not 0.36 8.81 Table II.2 c applicable (2) t i o n 3 2 : e a r n e d i n c o m e c r e d i t Se 12.78 7.47 0.15 4.80 0.35 Table II.2 c (15) t i o n 6 6 5 4 : e s t i m a t e d t a x p a y m e n t s Se 12.24 8.42 0.22 2.94 0.66 Table III.2 c (8) t i o n 6 0 1 7 : s e l f - e m p l o y m e n t t a x Se 10.78 6.35 0.12 3.98 0.34 Table I.2 c (6) t i o n 8 6 : s o c i a l s e c u r i t y b e n e f i t s Se 6.40 4.32 0.06 0.06 1.96 Table II.2 c (1 and 6) t i o n 2 1 : c h i l d - c a r e c r e d i t ( p l u s s e c t i o n 1 2 9 d e p e n d e n t c a r e ) Se 5.51 3.50 0.11 1.5 0.39 Table III.2 c (4) t i o n 2 1 3 : m e d i c a l e x p e n s e s Se (a) 4.44 (a) 2.80 (a) 0.06 (a) 1.41 (a) 0.17 Table II.2 c (b) 2.08 (b) 1.39 (b) none (b) 0.62 (b) 0.07 (14) t i o n 1 2 1 1 : n e t c a p i t a l l o s s ( a ) t o t a l ( b ) w i t h l o s s e s > $ 3 , 0 0 0 Se 3.66 2.59 0.05 0.87 0.14 Table II.2 c (11) t i o n 4 6 9 : p a s s i v e l o s s l i m i t s Se 3.34 2.92 0.04 0.31 0.07 Table II.2 c (4) t i o n 6 8 : l i m i t a t i o n o n i t e m i z e d d e d u c t i o n Se 1.68 1.26 0.06 0.31 0.04 Table I.2 c (8) t i o n 1 5 1 ( d ) ( 3 ) : r e d u c t i o n o f p e r s o n a l e x e m p t i o n Se 0.29 0.19 0.02 0.07 0.01 Table I.2 c (4) t i o n 5 5 : a l t e r n a t i v e m i n i m u m t a x Se 0.25 0.21 <0.01 0.04 <0.01 Table I.2 c (3) t i o n 3 8 : g e n e r a l b u s i n e s s c r e d i t Se 0.24 0.06 none 0.16 0.02 Table I.2 c (2) t i o n 2 2 : e l d e r l y t a x c r e d i t Se 0.14 0.11 <0.01 0.02 <0.01 Table IV.1 c (2) t i o n 4 2 : l o w - i n c o m e h o u s i n g c r e d i t Se 0.12 0.08 <0.01 0.02 0.01 Table III.2 c (2) t i o n 1 6 5 : n e t c a s u a l t y l o s s Se 0.01 0.01 <0.01 <0.01 <0.01 Table III.2 c (3) t i o n 1 7 2 : p e r s o n a l n e t o p e r a t i n g l o s s -------------------------------------------------------------------------------- Source: GAO analysis of IRS data. -------------------- \10 For many provisions listed in this report, information on how many taxpayers filed under the provision was not available in IRS' public file. For some provisions, such as section 135 on interest on U.S. savings bonds used for education, information is reported by the taxpayer but not available in IRS' public file. For other provisions, such as section 267 on related party losses, the taxpayer does not report any information on the application of the provision. SUMMARY OF MAJOR PROPOSALS TO CHANGE CURRENT TREATMENT OF MARRIED AND SINGLE TAXPAYERS ========================================================== Appendix VI Over the years there have been various proposals to change the tax treatment of married couples and single people. These proposals include: (1) mandatory separate filing by married couples using the same rate schedule as single taxpayers; (2) optional separate filing by married couples using the same rate schedule as single taxpayers; (3) tax deduction or credit for two- earner couples; (4) allowing single people to use the joint rate schedule; and (5) flattening the rate structure. These proposals all adjust, to some extent, the current balance among the principles of progressive tax rates, equal taxation of families with equal incomes, and marriage neutrality. We describe each of these proposals below. (1) Mandatory separate filing by married couples using the same rate schedule as single taxpayers. This proposal would require all married taxpayers to file as single individuals, with one rate schedule for all taxpayers. In effect, this change would reinstate the tax system in place before 1948, and would impose different tax burdens on families with the same income. To address the problems of the different tax burdens in community property and common law states, rules would have to be set up to allocate income and deductions. Mandatory separate filing would eliminate the marriage penalties and bonuses in the current rate schedule. However, if the allocation rules for income and deductions were different for married and single people, new penalties and bonuses could be created. (2) Optional separate filing by married couples using the same rate schedule as single taxpayers. As an alternative to mandatory separate filing, married couples could be allowed the option to file either under the joint rate schedule or the single rate schedule. (Currently, married couples can file separately, but the amount of taxable income at which the tax rates increase is much lower for such couples than for single individuals.) As with the first proposal, this would result in different tax burdens for families with the same income and there would need to be rules for allocation of income and deductions between spouses. Unlike the first proposal, though, there would be a certain revenue loss because only those married couples with tax decreases would be likely to file as single individuals. (3) Tax deduction or credit for two-earner couples. Another proposal would continue the existing system of joint returns, but would provide some relief to two-earner married couples through a deduction (or credit) equal to a percentage of the earned income of the spouse with the lesser amount of earnings. While this proposal would not make the system "marriage neutral," it would reduce the amount of the marriage penalty to two-earner couples. A tax deduction was allowed for two-earner couples between 1982 and 1986; this deduction was repealed by the Tax Reform Act of 1986. As enacted, this deduction provided lower taxes to all two-earner couples, not just those previously subject to a marriage penalty. Thus, although this reduced the marriage penalty for many couples, it also created marriage bonuses for other couples. (4) Single taxpayers file under the joint rate schedule. A fourth proposal would allow single people to use the joint rate schedule. In effect, this would lower the tax rates for single people. This proposal would not lead to a system that would be "marriage neutral" and would, in fact, tend to increase the marriage penalty for two-earner couples. To be feasible, this proposal would need to be supplemented by other relief for two- earner couples, such as the tax deduction or credit described above. (5) Flattening the rate structure. The final proposal would flatten the rate structure for all categories of taxpayers. By itself, this proposal would reduce the progressivity of the tax code. However, in doing so, it would decrease the number of tax brackets, thereby minimizing the effects of combining income on joint returns. When the Tax Reform Act of 1986 repealed the two-earner deduction, it also flattened the rate structure to reduce the marriage penalty to two-earner couples. MAJOR CONTRIBUTORS TO THIS REPORT ========================================================= Appendix VII GENERAL GOVERNMENT DIVISION, WASHINGTON, D.C. Ralph Block, Assistant Director, Tax Policy and Administration Issues Nancy Peters, Evaluator-in-Charge Cliff Tuck, Senior Economist SAN FRANCISCO/SEATTLE FIELD OFFICE Sam Scrutchins, Evaluator *** End of document. ***