The tax code contains nearly 10,000 selections and two million words. Over the past 10 years, alone, the tax code has been amended or revised over 4,000 times. As Congress looks to revise the code again, I like to reminisce and look at some inconsistencies in the tax code.
Did you know that there are provisions covering pet moving expenses for people who lost their job? What about a deduction for clarinet lessons if it helps correct a childâ€™s overbite, and a special carve-out for repairs for whaling boatsâ€”even though hunting whales is currently banned by the United States government?
Some provisions in the tax code are directly contradictory. For example, the limitations on high-income taxpayers who might want to make Roth IRA contributions. Roth contributions are contributions to a tax-deferred account where you donâ€™t get a deduction. And all monies withdrawn in retirement are tax-free. Under current law, joint filers with modified adjusted gross income (taxable income plus deductions for things like student loan interest and self-employment taxes) above $208,000 (singles above $140,000) are not allowed to make contributions to a Roth account.
But the tax code says that people at any income level CAN make contributions to a traditional IRA, up to $6,000 a year currently ($7,000 for people age 50 and over) where the contribution amount is not counted as taxable income.
The tax code specifies that people at any income level are eligible to make Roth conversions. In other words, they can move money from their IRA into a Roth IRA, and count the money moved as income. So itâ€™s possible for higher-income individuals to make contributions to their traditional IRA, and then their tax planner or financial advisor can move those traditional IRA contributions to a Roth account. It’s taxed the same as if the taxpayer had contributed to a Roth in the first place. The strategy known as a â€œback-doorâ€ contribution is perfectly legal.
In a perfect world, when two people file a joint tax return, they should move into higher tax brackets at twice the income of individual taxpayersâ€”right? But prior to 2017, the tax bracket thresholds for joint filers were considerably less than twice the bracket thresholds for single ones. The marriage penalty has been largely eliminated for most taxpayers.
Today, single filers move into the 24% tax bracket at $85,526 of income and joint filers enter the 24% bracket at exactly twice that amount: $171,051. Single filers enter the 35% bracket at $207,351 of income, while joint filers get there when their income reaches $414,701. BUT, single filers enter the top 37% bracket once their income reaches $518,401, while joint filers start paying at a 37% rate when their reported income is above $622,051. That’s much less than twice the former.
Other Marriage Penalty Residues
There are other residues of the marriage penalty still lurking in the tax code. Single people who receive Social Security retirement benefits pay taxes on those monthly checks when their income exceeds $25,000. For joint filers, the threshold isnâ€™t $50,000; instead, the taxes start when the couple reaches $32,000 in income. And single filers above $200,000 in income pay a 0.9% wage surtax and a 3.8% investment income tax. The joint filer threshold to be hit with these surtaxes is not $400,000; itâ€™s $250,000. If singles who each earn $125,000 to $200,000 decide to marry, theyâ€™ll get hit with these extra taxes that they wouldnâ€™t have had to pay before.
One might think that the tax code would encourage marriage, rather than penalize it. Instead, since 2017, some features of our tax system penalize married couples; albeit, a little less than before. This may be a step in the right direction, but it’s still inconsistencies in the tax code.