Most state income tax systems ‘ and the federal income tax system ‘ apply their tax rates differently to different family types. This is done in part to avoid a “marriage penalty” that could lead to higher taxes on a married couple than they would have paid as two single filers. The most common way to address this is by having wider tax brackets for married couples than for singles. For example, a state could apply its lowest tax rate to the first $20,000 of income for a single person and the first $40,000 for married couples. The wider brackets for married couples also address the fact that expenses for a family with two adults are likely to be higher than for one adult.
The District has a method for avoiding the income tax marriage penalty, but it is confusing and inefficient. The District’s income tax has one set of brackets and rates for all filers, regardless of filing status. This means that a married couple’s joint income could be taxed at a higher rate than two single people with the same income. To address this, the District allows married couples to file separately based on each spouse’s income, while keeping the information on the same return. This is referred to as “married filing separate on the same return” or “combined filing.” While this helps married couples avoid a marriage penalty, it also creates several problematic inefficiencies:
- Confusion for Eligible Families: The ability to file separately on the same return may not be clear, and some married couples may not realize they have this option. Married couples that file jointly may still face a “marriage penalty” and wind up paying more in taxes than if they had filed separately on the same return or each had filed as single. In addition, some low-income married couples may not realize they are eligible for refundable tax credits, like the Earned Income Tax Credit (EITC), if they file separately on the same return. The District’s tax return instructions are confusing with respect to credit eligibility and filing separately.
- Challenges in Creating New Brackets: The District created a new tax bracket for income above $350,000 in 2011. But, because two-earner families are allowed to split their income, this means that some families may not face the top tax rate until their income exceeds $700,000 — $350,000 for each spouse. Although it is likely that the DC Council intended the new tax bracket to apply to families earning more than $350,000, the reality is that for many high-income couples, the new bracket will not apply until their income hits a much higher threshold.
- Limited Flexibility in Setting Brackets for Higher Income Families: A number of states and the federal income tax system recognize that addressing marriage penalties and the needs of larger families is most important for low- and moderate-income families. These states have wider tax brackets for low and moderate-income married couples, but the brackets for singles and joint filers converge at higher income levels. This means the top tax bracket applies to income above a specified level that is the same for all family types. DC’s single set of brackets does not allow for this flexibility.
One approach the District can take to solve these inefficiencies is to adopt separate bracket structures for each filing status, as is done in the federal income tax and in just over half of the states that levy income taxes. This approach is easier for families to understand and thus is the best way to ensure families get marriage penalty relief. It also offers flexibility to design tax rates and brackets for families at different income levels.
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