Marriage Penalty Reduction Good for the Union?

President Clinton has demanded that Congress hurry and send him proposed legislation that would reduce the so-called marriage penalty--so that he can promptly veto it. Clinton says that poor and middle-income Americans would get no net benefit from the bill, which was approved by the Senate on July 21 and by the House the previous week. He contends that it gives away too much to the rich and could boost the federal deficit and, eventually, interest rates.

Couples would be wise to check for themselves, however, to see just how “marriage penalty” relief might affect them.

An analysis by the congressional Joint Committee on Taxation indicates that the biggest beneficiaries of this proposed law would be middle- and lower-income families with simple tax returns, who could see a double-digit percentage decline in the amount of federal income taxes they pay.

Though the bill did not pass by a “veto-proof” margin, the congressional vote was strong enough to override a veto if a relative handful of legislators changed their votes to support the measure. In the House, roughly 20 additional votes would be needed to get the two-thirds majority required; in the Senate, six more votes could put the measure over the top. That gives ordinary citizens the opportunity to influence the outcome by making their views known, particularly in an election year.

Who would benefit from the marriage penalty bill? How much tax could you save? And what can you do if you want to press the president or Congress to pass or reject the proposal? Here are some answers.

Question: What does the bill propose to do?

Answer: Three things. First, it would immediately increase the standard deduction for married couples to precisely twice the standard deduction for single filers. For the 2000 tax year, that would mean a married couple would get an $8,800 standard deduction, up from $7,350 under current law.

Second, it would gradually broaden the 15% tax bracket so that married couples wouldn’t get bumped into the 28% bracket until they earned twice as much as single filers.

Third, it would give low-income married couples greater ability to claim the earned income tax credit, a lucrative tax break for the working poor, by boosting the allowable income amount that they could jointly earn. Under current law, couples with two children and $12,690 in income can claim the maximum $3,888 credit. Once income exceeds that amount, the credit gradually declines, phasing out at $31,152. The new law would allow those earning up to $14,690 to claim the maximum credit. The phaseout point would rise to $33,152.

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Q: How would this help wealthy filers?

A: If you are wealthy but claim a standard deduction rather than itemized deductions, you would get a modest break. However, because most wealthy filers own homes, pay substantial state taxes and have other itemized deductions, it’s unlikely that many high-income filers would benefit from the standard-deduction provision.

However, every married filer would benefit from widening the 15% tax bracket. That’s because although much attention is given to “marginal” tax rates, American taxpayers actually pay “blended” rates that are created by paying no tax on income below your standard or itemized deduction amount; 15% tax on the income above that amount to a set figure; 28% on income above that amount; 31% above that; and 39.6% on income above those levels.

If the 15% tax bracket hits more income, then wealthy filers--and everyone else--will pay a somewhat lower blended rate.

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Q: How much tax would a married couple save if the president changed his mind and signed the bill?

A: That depends on how much you earn and pay in tax, as well as whether you claim a standard deduction or itemize. However, an analysis by the Joint Committee on Taxation indicates that the biggest beneficiaries would be married couples living on the edge of poverty.

According to this analysis, married couples with two children and $30,000 in gross income would see their net tax reduced by 143%, which would result in this family getting a tax refund that was $706 higher than under current law. Couples earning $20,000 would see a smaller, but still significant, tax cut--a 15.4% reduction in federal income tax--thanks largely to the changes the bill would make to the earned income tax credit program. Refunds for these couples would average $466 more than under current law.

Couples with higher incomes would see smaller percentage declines, but bigger dollar reductions in tax paid. For instance, a couple earning $200,000 and paying $45,924 in federal income tax would see a $1,807 saving, or 3.9% of their tax obligation.

This analysis assumes that all these couples claim the standard deduction. Those who itemize would realize a smaller tax benefit.

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Q: How would couples who itemize benefit?

A: The 15% tax bracket would apply to more of their income. Currently the 15% bracket ends at $26,250 if you’re single, but at $43,850 if you’re married, filing jointly. Under the proposal, the 15% bracket for married couples would gradually increase until it hit twice the 15% bracket for singles in 2004. Although all tax brackets are adjusted annually for inflation, that would mean a married couple would have $8,650 more of their income taxed at 15% (versus 28%) when the law is fully phased in. That would save a couple with $53,000 in taxable income $1,124.50 in federal tax.

However, the immediate impact would be far more modest, because the expansion of the 15% bracket is gradual. In 2000, the 15% bracket for married couples would expand by only $750, saving this hypothetical couple $97.50 on this year’s tax bill, says Bill Massey, editor at RIA, a New York-based tax information and software publisher.

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Q: Does the bill do anything to help single people?

A: Not a thing. Like many of the tax breaks passed in recent years, this bill is “targeted.” Only married couples benefit.

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Q: What can I do if I feel strongly that the bill should--or should not--pass?

A: Contact the president and your legislators. Your legislators are listed in the government section of your local telephone directory. The White House can be reached by phone at (202) 456-1414), by mail at 1600 Pennsylvania Ave., Washington, DC 20500, or via the Internet at https://www.whitehouse.gov. If you are unsure about who represents you in the House or Senate, go to https://thomas.loc.gov.

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Marriage Relief: The Bottom Line

Here’s what married couples at various income levels would gain in tax savings (i.e., either in bigger refunds or lower tax bills) if the marriage penalty relief proposal were to become law. These savings would be phased in by 2004. The figures assume the couple have two children.

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Tax or refund (R) under Pctg. increase Annual Current tax marriage tax relief in refund or gross income or refund (R) reconciliation act decrease in tax bill $20,000 $3,024(R)* $3,490(R)* +15.4% 30,000 493(R)* 1,199(R)* +143.2 50,000 3,425 3,185 --7.0 75,000 7,975 6,935 --13.0 100,000 14,975 13,285 --11.3 200,000 45,924 44,117 --3.9

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Note: Couples who itemize deductions would save less than indicated.

R = refund

* People in these income categories pay no federal income tax, and in fact, can already get federal tax refunds because of the earned income tax credit, a subsidy for the working poor.

Source: Joint Committee on Taxation

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Times staff writer Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail [email protected].