The marriage credit, enacted by the 1999 Legislature, is designed to reduce the “marriage tax penalty” paid by some married couples without increasing marriage
bonuses. The credit equals the higher income tax paid by a married couple under the married joint income tax brackets, as compared with the tax they would pay if their earned income were taxed separately under the single tax brackets. The maximum credit in tax year 2008 is $332; the credit amounts and other parameters are adjusted annually for inflation and for changes to Minnesota’s tax rates. This information brief explains the marriage credit and some marriage penalties in Minnesota’s income tax system.
The Marriage Credit
Legislators sought to address the marriage penalty issue as part of a package of income tax rate reductions proposed in the 1999 legislative session. Initial legislation proposed increasing the brackets for married joint filers to be twice the width of the brackets for single filers. This approach had been proposed in several bills introduced in both the 1997 and 1998 legislative sessions. While increasing the married joint brackets would have eliminated penalties for the 350,000 Minnesota couples who faced them, it also would have increased marriage bonuses for other filers. The cost depended on the magnitude of the rate reductions proposed; setting the married joint brackets at twice the width of the single brackets at the 5.5 percent, 7.25 percent, and 8.0 percent rates ultimately enacted would have cost an estimated $106 million in tax year 1999. Over half this cost—$58 million—would have provided bonuses, with the remaining $48 million removing penalties.
Budget constraints led lawmakers to seek a less costly way to address the issue, and the discussion focused on a credit that would remove the penalties without increasing bonuses. The marriage penalty credit that developed consisted of a table that provided a credit roughly equal to the penalty faced by couples at different income levels. The credit offsets penalties under the rate and bracket system, but does not provide bonuses. The estimated cost for the credit was $48 million in tax year 1999, $58 million less than the estimate for doubling the brackets.
The credit is based on the earned income of the lesser-earning spouse and the taxable income of the couple. The credit as enacted in 1999 defined “earned income” as wages and self-employment income. Information about these forms of income is readily available to both taxpayers and the Department of Revenue through W-2 forms filed by employers and through reporting of self-employment income for Social Security tax purposes. Legislation enacted in 2000 expanded the definition of “earned income” to include taxable pension and Social Security income, which are reported separately to each spouse and generally reflect an individual’s earning history.3 Joint taxable income is already calculated as part of the tax return. As a result, it is relatively simple for taxpayers to look up their credit in the tax instructions. The table below shows the credit as it will appear in the 2008 tax booklets.
The credit table is a function of the difference between Minnesota’s three marginal rates and the relationship between the brackets for single and married joint filers. The credit table enacted in 1999 was tied to the marginal tax rates in effect for 1999—5.5 percent, 7.25 percent, and 8.0 percent, with a 1.75-percentage point difference between the first and second rates, and a 0.75-percentage point difference between the second and third rates. The 1999 law directed the Commissioner of Revenue to index the credit annually for inflation, just as the brackets are indexed annually. The 2000 omnibus tax law reduced the marginal tax rates to their current level (5.35 percent, 7.05 percent, and 7.85 percent) and adjusted the table to reflect a changed relationship between the rates. There is now a 1.7-percentage point difference between the first and second rates, and a 0.8-percentage point difference between the second and third rates. The 2000 law also directed the commissioner to adjust the table as needed to reflect the relationship between the tax rates.4 This provision allows the marriage credit to automatically follow along with any future changes to the marginal rates. In 2001, the legislature enacted language proposed by the Department of Revenue replacing the credit table enacted in 1999 with the formula used in calculating the table.5
The marriage credit only addresses penalties imposed under Minnesota’s rate structure. It does not remove bonuses currently paid under that rate structure, nor does it alleviate penalties or bonuses that are “passed through” to the Minnesota income tax because of features of federal law. Instead, it simply provides a credit roughly equal to the penalty couples face because of Minnesota’s progressive rate structure and combined filing requirement.
The marriage credit does not address penalties that exist as a result of the distribution of unearned income between spouses. There is currently no reporting required as to the amount of unearned income on a return that pertains to each spouse. Applying a credit to unearned income would require greater reporting and could also encourage couples to reallocate the ownership of assets to maximize the credit. The types of income used in calculating the marriage credit—wages, self-employment income, taxable pensions, and taxable Social Security benefits—cannot be easily reallocated from one spouse to another. Because it was not the intent of legislators to either provide a complicated solution or one that resulted in the tax system encouraging asset shifting, the credit was limited to earned income.
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.
3 Laws 2000, ch. 490, art. 4, § 22.
4Laws 2000, ch. 490, art. 4, §§ 23-24.
5 Laws 2001, 1st spec. sess., ch. 5, art. 7, § 41.