Have you heard people refer to the "marriage penalty" but didn't know what they meant? Here's what it means and how to avoid owing big time because of it.

There are two parts to "the marriage penalty". The first has to do with the standard deduction. The standard deduction for a single person this year is $4,300. That means two single people filing their individual returns would get total standard deductions of $8,600. The married filing joint deduction is $7,200. Right off the bat you have lost $1,400 in deductions. The thinking behind this is understandable. It is assumed that you have two separate households to keep up until you are married and then you have only the expenses of one household.

The other part of the problem has to do with the tax brackets. The Single tax bracket taxes your first $25,750 of taxable income at 15%. Two single people would get 15% up to a combined total of $51,500 (after deductions). The Married Joint table has 15% up to $43,050. That's a difference of $8,450 on which a married couple would pay 28% instead of the 15% that two single people would pay. In tax dollars that translates to $1,098.50 extra ($8,450 x the extra 13%). It goes on and on like that up through the tax brackets 28%, 31%, and 36%. A Married couple and a Single taxpayer (in fact every status) end up in the highest tax bracket of 39.6% at exactly the same amount of income. Now, how to deal with it.

First, if you are just getting married, do not rush back to work and change your W-4 from Single to Married. Here is the problem you face in filling out your W-4 when you are married and both spouses work (this also applies to a person who has two jobs). If you both fill out your W-4 to say that you are married, your withholding will be calculated as if each of you gets to take the married joint standard deduction of $7,200. You may have enough itemized deductions to make up for this, but if not, watch out.

Due to the disparity in the tax brackets mentioned earlier, I would strongly recommend using the Single status and adjust from there with exemptions. Using the Married status could cause all of your income to be withheld on at lower rates than you will actually pay.

For example, let's assume a just married couple who each have salaries of roughly $50,000. They both claim Married and think they are having extra taken out by claiming zero exemptions. Here's what happens. Payroll withholding will be calculated as if they each get a married joint deduction of $7,200, on which no tax is owed; the remaining $42,800 of each income (50,000-7,200) will be withheld on at a rate of 15%. Tax time comes and on their return they have $100,000 income minus $7,200 married joint deduction (assuming they can't itemize) and minus $5,500 for two exemptions (assuming no dependents). This leaves taxable income of $87,300. The first $43,050 is taxed at 15%, the remaining $44,250 is taxed at 28%. Total tax would be $18,848. Their total withholding would be about $12,848, leaving a balance due of $6,000. Of course you wouldn't let it happen twice, but that first year would be quite a shock!

The easiest solution if you ended up owing this year, is to simply divide what you owed by the number of paychecks you get per year. Fill out a new W-4 the same as it was before but fill in the amount you came up with as an "extra" amount to be withheld.

Alternatively, look at the total dollar amount of your deductions (standard or itemized) plus exemptions this year. Then fill out a new W-4 using whatever combination of filing status and exemptions meets your needs. You do not have to use your true filing status and exemptions. The only thing that matters is having the right amount of tax withheld.

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