Every year, we sit down with families who made a particular financial move, and as a result, some unforeseen — and unintended consequence — kicked in. This could be an unexpected tax event, it may have been a broken relationship, or a business failure.
But sometimes these consequences are because of the tax code itself.
Take marriage, for example.
The foundations of most civilizations function on the principle that children are best raised in a home by two parents in a committed relationship. As such, couples have always been encouraged to marry.
(My point in this article, by the way, is about what’s in the tax code, and how it encourages social change. So this is NOT at all to speak of anything related to the special heroism which is single parenthood.)
But for many couples, our current tax code actually discourages marriage.
Here’s how it does so…
An individual who is working but makes a smaller income qualifies for the “Earned Income Tax Credit” (EITC). It’s refundable, which means that whether you owe that amount in tax or not, you may still receive it as a refund.
The amount is calculated based on your salary, filing status and number of children. There is a plateau at which point the amount of the credit goes down.
Without going into all the math, let me show you an example:
If you and your partner are not married but have two children, you have some flexibility. Each of you can earn $17,100 and still collect the maximum $3,169 for a total of $6,338.
A married couple, on the other hand, with two children earning the same $34,200 would only collect $2,735. The formula “penalizes” them $3,603, or 10.5% of their salaries, simply because they are legally married.
And the marriage penalty only increases as income and the number of children rise. The”penalty” can be as high as $8,400 when compared against unmarried couples in certain salary levels.
This should be sobering to us as a society. I have no problem whatsoever with each individual making their own choices in these matters. And the EITC receives support from all parties because it’s an incentive to work (it only is received when there is a job in place). But we shouldn’t disincentize a civilizational building block through our tax code.
One solution could be to extend it to all individuals equally, regardless of marital status. But the point I want to get across is this: our choices have consequences, many of which aren’t immediately apparent. So be wise, and have a guide as you make tax and financial decisions moving forward.
(All of which and more, by the way, is why you should be sure to ask us about tax PLANNING this year, rather than tax “reporting” — which is what the tax return preparation process really is.)
It helps to have someone who’s seen the road ahead.