June 10, 1999
ALLEVIATING MARRIAGE PENALTIES IN THE EITC
by Iris J. Lav
Congress may consider marriage-penalty tax relief this year, perhaps through an increase in the standard deduction for married-filers or creation of a new deduction for married filers with two earners. Such approaches can provide relief to middle-class families that face marriage tax penalties. But they would do nothing to alleviate the significant marriage penalties that some low- and moderate-income working families face.
Raising the standard deduction or establishing a two-earner deduction cannot affect low- and moderate-income working families that have no income tax liability and hence cannot use larger deductions. These are families for which the combination of their personal exemptions, the standard deduction, the child credit, and if applicable, the dependent care credit eliminates their income tax liability.
Many such families do receive the Earned Income Tax Credit. As explained below, the EITC can cause marriage tax penalties. Addressing this source of marriage tax penalties entails modifying the EITC for married filers.
Senator Phil Gramm last year offered an amendment to coordinate broader marriage penalty tax relief with an adjustment in the EITC for married filers so low- and moderate-income working families also would receive marriage penalty relief. Some other Senators and House Members, including Senator Tom Daschle, also introduced measures that follow such a course. As these measures show, marriage penalties arising from the EITC structure can be alleviated by creating an EITC computation applicable to married couples.
Structure of the EITC
The Earned Income Tax Credit for families with children is a refundable credit for low- and moderate-income taxpayers who have earnings from work. The credit is structured so it phases out gradually for families with incomes in excess of a specific level. In 1999, the phase-out range begins when gross income reaches $12,460 and continues through gross income of $26,928 for families with one child and $30,580 for families with two or more children. To the extent that combining the earnings of two people as a result of marriage boosts the couple's income to a point in the phase-out range at which they receive a smaller credit than one or both of them would have received if still single (or raises their income to a level that makes them ineligible for the EITC), the family experiences a marriage penalty.
An EITC-related marriage penalty would occur, for example, if a low-income man married a low-income woman who had similar earnings and was raising two children. Consider, for example, a man and woman that each work full time throughout the year at the federal minimum wage. If unmarried, the man would file as a single taxpayer, while the woman would file as a head of household and claim an EITC for her two children. Before they are married, the man pays $549 in income tax while the woman qualifies for a $3,816 refund the maximum EITC for a family with two children in 1999. Their combined refund thus is $3,267. If they marry, the couple's combined income of $21,424 puts them in the phase-out range of the EITC and reduces their EITC substantially. Their combined refund is reduced from $3,267 to $1,928, yielding a marriage penalty of $1,339. (Note: Like various other provisions of the tax code, the EITC creates marriage bonuses for some families and marriage penalties for others.)
Alleviating the Problem
This problem can be addressed by creating a distinct EITC computation for joint filers so that the phase-out of the credit begins (and ends) at a higher income level for married couples than for taxpayers who are not married. The effect is to increase, relative to current law, the amount of EITC a married couple can receive when its income falls in the phase-out range of the EITC schedule.
Figure 1 shows the effect of creating a separate EITC computation for joint filers that increases the amount of income the couple can earn before the EITC begins phasing out. In this example, which reflects one of the measures introduced last year to alleviate EITC marriage penalties, the beginning of the phase out for joint filers is raised from $12,480 to $16,020.
Raising the beginning of the phase out range means that married-couple families with incomes up to $16,000 would be able to receive the maximum EITC. In addition, EITC-eligible married families with incomes above that level would receive somewhat larger EITCs than under current law, and the income level at which the EITC is fully phased out would increase.
In the example above the marriage of a single man and a woman with two children, each of whom work full time throughout the year at the federal minimum wage the couple's EITC would increase by $750, from $1,928 to $2,678. This would alleviate 56 percent of the marriage penalty the couple experiences under current law.