The Marriage Penalty in Minnesota’s Income Tax Rates and Brackets
There are many marriage penalties and bonuses under the federal and Minnesota income taxes. A marriage penalty occurs when a married couple pays higher tax than they would if each spouse could file as a single and pay tax on his or her own income. A bonus occurs when they pay lower tax as a married couple than they would if they filed as singles. Penalties and bonuses result from the following:
- the use of combined income for a married couple to calculate their tax
- the progressive rate structure
- the dollar limits on deductions and credits
Minnesota’s income tax produces marriage penalties and bonuses because couples generally pay tax under a progressive rate structure on their joint incomes. As has been widely recognized, when two individuals marry, their combined income tax frequently changes. It may increase, resulting in a marriage “penalty,” or it may drop, yielding a marriage “bonus.” Penalties and bonuses result because both federal and state taxes effectively require the spouses to combine their incomes in calculating tax.1 In the case of Minnesota’s income tax rates, joint filing and reporting of income interacts with the progressive tax rate schedule to produce penalty, while one-earner couples will receive a bonus. The examples in the boxes on this page and the next illustrate how the Minnesota tax, before determination of the marriage credit, can result in marriage penalties for some couples and bonuses for others.
Example of a Marriage Penalty
H and W each earn $30,000 and claim the standard deduction. If they can file as singles, each will have Minnesota tax liability of $1,126 or a combined tax of $2,252 for tax year 2008. If H and W marry and file a joint return, their combined tax increases to $2,426, resulting in a marriage penalty of $174.
The marriage penalty results because the married joint tax brackets are not twice the width of the single brackets. For a single filer, the first $21,800 of income is taxed at 5.35 percent. Thus as single filers, H and W would have $43,600 of their income taxed at the 5.35 percent rate as (i.e., twice the bracket for single filers). As a married joint filer, the first $31,860 is taxed at 5.35 percent and additional income at 7.05 percent. As a result, H and W will have $11,740 more ($43,600 – $31,860 = $11,740) of their income taxed at 7.05 percent, rather than 5.35 percent. This accounts for the $174-marriage penalty. As described in the text, the marriage credit addresses this marriage penalty.2
Example of a Marriage Bonus
W earns $60,000 and claims the standard deduction. H has no income and no tax. W’s tax as a single filer would be $3,228 for tax year 2008. Marriage to H will reduce the tax to $2,426, resulting in a marriage bonus of $802. Three factors account for the bonus:
Other Marriage Penalties in Minnesota’s Income Tax System
Nine other features of the Minnesota individual income tax create marriage penalties or bonuses.
The following table lists provisions of the Minnesota income tax that may cause individuals who marry to pay a higher Minnesota income tax. The table also shows the theoretically maximum marriage penalty and bonus for each of the provisions.6 The provisions are listed in the order in which they occur in computation of the income tax—i.e., deduction from federal tax income first, application of the rates, and finally tax credits.
|Provision||Maximum Penalty||Maximum Bonus|
|Calculation of taxable income|
|Education deduction per dependent K-6||None||128|
|Education deduction per dependent 7-12||None||196|
|Charitable contribution deduction for
|Couples with dependents||708||236|
|Dependent care credit||1,440||None|
|Education credit||1,00 times number of children||None|
|Long-term care credit||None||100|
|Working family credit||3,372||1,686|
|Alternative minimum tax exemption||2,040||1,020|
|Alternative minimum tax exemptionphaseout||1,200||600|
A number of features of the federal income tax create marriage penalties or bonuses that carry over to the Minnesota individual income tax.
Marriage penalties and bonuses under the Minnesota income tax also result from the close links between the state tax and the federal income tax. Calculation of Minnesota taxable income begins with federal taxable income. Taxpayers take the amount of federal taxable income from their federal return and then make a few modifications to determine Minnesota taxable income to which the tax rates apply. As a result, many deductions and exclusions under federal law determine the amount of state taxable income. For example, itemized and standard deductions, deduction of capital losses, and retirement savings deductions (e.g., 401(k) plans, IRAs, and so forth) are determined by federal law for state purposes.
The legislature has opted to conform to federal income tax provisions for a number of reasons. Perhaps the most important of these is simplicity and ease of compliance and administration for both taxpayers and the Revenue Department. Since most individuals must comply with the federal tax, adopting its provisions greatly simplifies compliance with the Minnesota tax. Adopting an approach that deviates from federal law on these basic tax base calculations could have a high cost in additional resources for individuals to comply with the law. This was one of the major complaints about the pre-1985 Minnesota tax, which differed substantially from federal law; the pre-1985 law included using individual filing rather than joint filing by married couples, the major source of penalties and bonuses.
The federal government enacted several marriage penalty relief provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The act does the following:
- Increases the standard deduction for married joint filers to be twice as large as the deduction allowed for single filers. Subsequent federal legislation (the Jobs Growth and Tax Relief Reconciliation Act (JGTRRA) of 2003 and the Working Families Tax Relief Act (WFTRA) of 2004) accelerated this increase to take effect in 2003.
- Increases the size of the 15-percent bracket for married joint filers to be twice the size of the bracket for single filers. (Scheduled to take full effect for tax year 2008.)
- Increases the income level at which the earned income credit begins to phase out for married joint filers. (Scheduled to take full effect for tax year 2008.)
Minnesota conformed to the acceleration of the increased standard deduction in JGTRRA 2003 (effective for tax years 2003 and 2004), but delayed one year, to tax year 2006, before conforming to the continued acceleration of the deduction in WFTRA 2004. As a result, the standard deduction allowed married joint filers at the state level in 2005 was smaller than that allowed at the federal level. For 2006 through 2010,7 the increased standard deduction will flow through to Minnesota income tax returns and decrease penalties at the state level. The other two federal changes do not directly affect penalties in Minnesota’s income tax. However, in 2001 Minnesota followed the federal earned income tax credit changes by increasing the income level at which the working family credit begins to phase out to match the increases provided at the federal level under EGTRRA: by $1,000 in tax years 2002 to 2004, $2,000 in 2005 to 2007, and $3,000 in 2008, with the amount adjusted for inflation in following years.8
This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota Income Tax Marriage Credit, written by legislative analysts Nina Manzi and Joel Michael.
1 A married couple may file separate federal returns with each spouse separately reporting his and her income and deductions. However, doing so nearly always results in a higher total tax liability. Minnesota law requires taxpayers to file using the same filing status that they do for federal purposes. Minn. Stat. § 289A.08, subd. 6.
2 Before tax year 2003 and in tax year 2005, H and W would have faced an additional marriage penalty under the Minnesota income tax as a result of the standard deduction for married joint filers being smaller than that allowed for single filers. As a result, marriage resulted in a combined reduction in the standard deduction compared with filing singly. The federal Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 put the marriage penalty in the standard deduction on a schedule to gradually phase out by tax year 2009. The federal Jobs Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 temporarily accelerated the married joint standard deduction to equal twice the single deduction for tax years 2003 and 2004 only. Minnesota conformed to the EGTRRA 2001 and JGTRRA 2003 changes. The federal Working Families Tax Relief Act of 2004 (WFTRA) further accelerated the schedule so that the married joint standard deduction would equal twice the single deduction for tax years 2005 through 2010. Minnesota did not conform to WFTRA until tax year 2006, so that Minnesota’s income tax included a marriage penalty resulting from the standard deduction in tax years before 2003, and in tax year 2005. The increase in the standard deduction for married joint filers sunsets after tax year 2010; unless Congress extends this provision and Minnesota conforms, married joint filers will once again face an additional marriage penalty due to the difference in the married joint and single standard deduction beginning in tax year 2011.
6 The amounts are theoretical maximums, since it is not clear if any couple has the specific circumstances necessary to realize the maximum penalty or bonus. In some instances, fairly unusual or atypical circumstances may be required to reach the maximum penalty or bonus. Nevertheless, the maximums may be useful to point out the outer limits or parameters for the penalties and bonuses of each provision.
7 Like many other EGTRRA 2001 provisions, the increased standard deduction sunsets after tax year 2010.
8 Laws 2001, 1st spec. sess., ch. 5, art. 10, § 7; the increase in the income level at which both the earned income credit and the working family credit begins to phase out sunsets after tax year 2010.