Clinton Budget Aftermath : ‘Til Death Do We Pay : Under New Tax Plan, Marriage Costs More than Ever

Thanks to President Clinton’s just-passed tax plan, many married couples can save hundreds or thousands more dollars on their taxes. There’s just one hitch: They have to get divorced.

That’s because the “marriage penalty”--how much more couples pay in tax by being married than by being single--became far more severe because of how tax brackets work under the Clinton plan.

Indeed, the marriage penalty has become so severe for some taxpayers that divorce is suddenly becoming a viable option for happy couples who simply want to reduce their tax bills, accountants say.

“I have four clients who already have asked us to run the numbers” delineating how much tax they’d save by getting divorced, says Philip J. Holthouse, partner at Holthouse Carlin & Van Trigt in West Los Angeles. “The marriage penalty is phenomenal.”

The increase in the marriage penalty can be quite significant whether you’re rich, poor or elderly. A retired couple jointly earning $60,000 pays an additional $1,960 in tax because of the marriage penalty under the Clinton law. A high-income family earning $600,000 annually pays nearly $13,000 a year more. And a low-income couple earning $30,000 pays $600 more. These financial burdens are in addition to the marriage penalty that already existed under the old law.

“That’s how our government supports family values,” grouses one government official. “They make it cheaper to live together than get married.”

Explaining how the marriage penalty comes into play is complicated, as is virtually every segment of today’s U.S. tax code. Basically, it involves the difference in income levels at the point at which tax brackets change for married versus single filers. In a simple example, one single person earning $50,000 is in the 28% bracket; two people earning $50,000 and filing jointly are pushed into the 31% bracket.

The marriage penalty has been in the tax code for years--for a reason. Uncle Sam figured that it’s cheaper for two people to live together than live alone. But if two people live together unmarried, they save on living expenses and taxes too. (Incidentally, the tax code prohibits you from getting around the penalty by staying married and filing separately. But there’s no prohibition against legally separating or divorcing and physically staying together.)

“Years ago, there was a couple that kept getting divorced in December and remarried in January. And we ruled that those were sham transactions,” says Robert Giannangeli, an IRS spokesman. “But as long as it doesn’t violate any local laws, your living arrangements are not a consideration for the IRS.”

Yet, until now, married couples haven’t divorced for tax purposes in large numbers because there are advantages to being married. Health care coverage at work, for example, is designed for a traditional family structure. If you get divorced, you may still be able to cover your kids, but your spouse is probably out of luck.

Estate laws also favor marriage. If you die without a will, your assets are generally automatically given to your spouse. This is not the case when you’re divorced. Indeed, a divorce may undermine a formal will unless the will specifically notes that the divorced spouse is to remain as a beneficiary.

The additional marriage penalty under the Clinton law varies with personal circumstances, but a few examples can illustrate how it works:

* Consider a two-income couple that we’ll call Jane and John Smith. Jane earns $165,000 annually while John earns $50,000. They have two children and $50,000 in itemized deductions.

Married, Jane and John pay $42,950 in taxes; unmarried, they’d pay a total of $37,746--a $5,204 marriage penalty because the couple is now in the 36% bracket under the Clinton law. As single filers, Jane would only be in the 31% bracket and John in the 28% level. (Under previous law, their “marriage penalty” amounted to $4,237.)

* Higher-income couples have a greater incentive to divorce because of the surtax in Clinton’s tax law, which imposes a 10% additional tax on earnings above $250,000, regardless of marital status. A couple earning $600,000--$300,000 each--would save $13,795 in taxes under the Clinton plan if they split up. Under old law, their marriage penalty was just $961.

* Retirees can also benefit from a split, thanks to the hikes in Social Security taxes for couples earning more than $44,000 and single filers earning more than $34,000.

Hypothetical retirees Eugene and Helen Brown together earn $60,000, including $20,000 in Social Security benefits. Married, they’ll pay $7,719 in taxes under the Clinton law, compared to $5,759 under old law. Assuming they divorced and split their income equally, they’d save $3,053 in tax, reducing their total tax bill to $4,666. Their additional marriage penalty is $1,960 above the $1,093 penalty under the old law.

* On the other end of the spectrum, poor couples can actually make money by getting divorced thanks to the boosted and expanded earned income tax credit. Here’s how:

Sally and Tom Stone have combined income of $30,000. Tom earns $20,000 and Sally earns $10,000. They have a 2-year-old son and no health insurance. Together, they can’t apply for the earned income credit, a special tax break for the working poor, because they earn too much money.

But if they divorce, Sally can claim the credit if she provides more than half the support for their child. Under current law, her earned income credit amounts to $1,434. Under the Clinton plan, her credit would rise to $2,038.

But is the tax saving worth the emotional and financial cost of a split?

Besides annoying your relatives and possibly coming into conflict with your church, you’d have to hire an attorney to handle the divorce and create a will and/or estate plan that recognizes the split. That could cost anywhere from a few hundred to several thousand dollars. You may also have to buy separate health insurance for one spouse or leave that spouse uninsured.

There could also be detriments unique to your personal situation. Anyone who seriously considers divorce for tax reasons should consult both financial and spiritual advisers.

Marriage Can Be Taxing

President Clinton’s new tax law sharply increases the “marriage penalty”--how much more couples pay in tax by being married than by being single. Here are a few examples:

Retired couple on Social Security

Income: $40,000 from pensions and interest, $20,000 from Social Security

Marriage penalty, old law: $1,093

Marriage penalty, new law: $3,053

Lower-income couple with one child

Income: Husband earns $20,000, wife earns $10,000

Marriage penalty, old law: $1,434

Marriage penalty, new law: $2,038

High-income couple

Income: Husband and wife each earn $300,000

Marriage penalty, old law: $961

Marriage penalty, new law: $13,795

--Sources: Holthouse Carlin & Van Trigt; KPMG Peat Marwick; Conference committee report.