Page 635 - TaxAdviser_2022

EXPENSES & DEDUCTIONS

does, however, provide for a workaround article focus predominantly on taxpay- couples. Some of these factors preceded
to the SSTB rules for taxpayers that fall ers that fall within the Sec. 199A(d)(3) the TCJA, such as: (1) threshold and/
below certain income levels. income limits. or exemption amounts for long-term
capital gain/qualifying dividend tax,
SSTB exception based on The TCJA’s impact on the net investment income tax, the ad-
taxable income marriage penalty vs. bonus ditional Medicare tax, and the AMT
Sec. 199A(d)(3) provides for a full The existence and size of a marriage not being double those of single filers;
exception to the SSTB exclusion for penalty or benefit is a function of a (2) inequity in the limitations imposed
taxpayers whose taxable income before variety of factors, such as the amount of on certain itemized deductions (e.g.,
consideration of any Sec. 199A deduc- combined income, how much income the state and local tax deduction cap of
tion does not exceed certain thresholds. can be attributed to each individual $10,000 is not doubled for married joint
For 2022, the thresholds are $340,100 (e.g., approximately evenly or signifi- filers); (3) rules related to the inclusion
for married taxpayers filing jointly cantly disparately), the additional tax of Social Security income and deduction
and $170,050 for all other filers. A systems to which the taxpayers are sub- of IRA contributions; and (4) access
partial SSTB exception is available for ject (e.g., the net investment income tax to the earned income tax credit and
married taxpayers filing jointly with or the additional Medicare tax), as well other credits. While the TCJA imposed
taxable income between $340,100 and as the eligibility to claim a variety of de- statutory modifications to many of
$440,100 (i.e., with a phaseout ceiling ductions (e.g., for deductible individual the common factors impacting mar-
of $100,000 above the threshold) and retirement account (IRA) contributions riage penalties and bonuses (e.g., state/
for other filing statuses with taxable in- and itemized deductions) and tax cred- local taxes), a new factor in the mar-
come between $170,050 and $220,050 its. Due to the federal tax system’s pro- riage penalty/bonus game was created
(a phaseout ceiling of $50,000 above gressive tax rate structure that varies by through the enactment of the Sec. 199A
the threshold).²⁴ Taxpayers with taxable filing status, marriage benefits are more QBI deduction.
incomes exceeding the upper threshold likely to surface when individuals with
will not be able to include any SSTB disparate income amounts marry, while Implications for a marriage
income as QBI for purposes of the Sec. marriage penalties are more likely to penalty/bonus
199A QBI deduction. occur when two individuals with equal The analysis below focuses primarily on
In computing the QBI with respect incomes marry. couples with taxable income below the
to an SSTB, the taxpayer only factors Various researchers examined the Sec. 199A(d)(3) income thresholds be-
in the applicable percentage of qualified TCJA’s impact on marriage penalties/ cause the 2018 IRS Statistics of Income
items of income, gain, deduction, or loss, bonuses.²⁵ Three studies found that, Report indicates that those amounts
and of allocable W-2 wages and quali- while the TCJA attempted to mitigate correspond to approximately 93% to
fied property. In summary, taxpayers marriage penalties by providing greater 95% of all married couples.²⁶ Studies
who fall below the income thresholds parity in the tax rate tables (i.e., the from as early as 1995 to as recently as
have relatively unfettered access to the MFJ tax rate tables were made double 2018²⁷ provide evidence that in only
20% QBI deduction regardless of the the single rate table up to combined relatively few situations do marriage
type of entity in question (e.g., SSTBs). taxable incomes of $400,000 for tax penalties or bonuses seemingly impact
The Sec. 199A marriage bonus/penalty year 2018), other factors clearly per- the timing of a couple’s nuptials. How-
analyses that are presented later in this petuated the marriage penalty for some ever, it was not until Obergefell ²⁸ was

24. For tax year 2020, the corresponding phaseout ranges (which are used in 27 Sjoquist and Walker, “The Marriage Tax and the Rate and Timing of Mar-
.
the scenarios below) were $326,600 to $426,600 for married taxpayers riage,” 48-4 National Tax Journal 547 (1995); Alm and Whittington, “Does
filing jointly and $163,300 to $213,300 for all others. the Income Tax Affect Marital Decisions?” 48-4 National Tax Journal 565
25. El-Sibaie, “Marriage Penalties and Bonuses Under the Tax Cuts and Jobs (1995); Congressional Budget Office, “For Better or For Worse: Marriage
Act,” Tax Foundation Fiscal Fact No. 573 (February 2018); Yurko, Cheng, and the Federal Income Tax” (June 1997); Morrow, Franklin, and Gagnon,
and Metrejean, “The Marriage Tax Penalty Post-TCJA,” 50 The Tax Adviser “Tax Considerations for Marriage: I Do … or Not,” 149 Tax Notes 1059
438 (June 2019); Rubenfield and Pandit, “The Status of the ‘Marriage (Nov. 23, 2015); El-Sibaie, “Marriage Penalties and Bonuses Under the Tax
Penalty’: An Update From the Tax Cuts and Jobs Act,” The CPA Journal Cuts and Jobs Act,” Tax Foundation Fiscal Fact No. 573 (February 2018).
(February 2019). 28. Obergefell v. Hodges, 576 U.S. 644 (2015).
26. Internal Revenue Service, Statistics of Income: Individual Income Tax Return
Line Item Estimates 2018.

26 December 2022 The Tax Adviser