Does the ACA Have a “Marriage Penalty”?
According to the National Center for Health Statistics, January is the month during the year that has the least number of marriages performed.* Yet, this period of courthouse calm may be unduly deceptive: Data from a variety of wedding planners suggest that serious ceremonial preparations are well underway for weddings slated for spring and summer.**
So, with marriage on the mind, we instinctively turned to the topic of taxes. Indeed, romance and the Internal Revenue Code have more in common than you might think. And in this season of ACA open enrollment, the question naturally arises: Does the ACA have a marriage penalty similar to that with federal income taxes?***
Alas, a simple answer (like “I do”) is impossible to provide. But here’s what uninsured couples tying the knot may want to know:
Some individuals with similar incomes may lose eligibility for tax credits if they marry. For example, two people who each have an income of $40,000 may be eligible for the premium assistance tax credits under the ACA – but only if they remain single. If they marry, then they would not qualify for the credits because their income would be over the eligibility limit for a household of two. If they marry, these taxpayers will usually pay the same amount of taxes when they file a joint return or even separate returns. If they marry and choose to file separate returns they could lose some of their credits and deductions because many of the credits and deductions are not available when filing separate returns.
Individuals with different incomes face a complex set of choices. For example, two people in a relationship who have incomes of $30,000 and $80,000, respectively, would not qualify for the tax credits if they get married (because their combined income is above the limit for a couple). However, the individual making $30,000 would qualify for the tax credits if he or she remains unmarried (as that individual’s income is below the eligibility limit for a household of one). Of course, the couple may end up paying a lower marginal tax rate if they marry and exercise a new right to file jointly – so part of the decision about whether and when to marry may involve a complicated trade-off between minimizing their income tax liability and accessing insurance through the new premium tax credit program. If they marry, these taxpayers will pay less in taxes on their combined income, but the taxpayer with the $30,000 will lose some credits, due to the increased total income which is greater than the maximum income amount for certain other credits (such as the Saver’s Credit for contributions for retirement plan and IRA contributions).
Some married couples in which one member has employer-sponsored insurance may lose out. The reason is simple but not intuitive: the final rule on premium tax credit eligibility states that individuals who have access to "affordable" employer-sponsored coverage are ineligible for premium tax credits. However, "affordability" of employer-sponsored insurance is determined only with regard to the employer contribution to the employee-only coverage. Consequently, a married spouse may be ineligible for tax credits if his or her spouse’s employer offers spousal coverage – even if the employer makes no contribution toward the associated premium for the spousal coverage. Because the married spouse has an offer of coverage that is nominally “affordable” (as defined by the IRS in relation only to the cost of employee-only coverage), then this spouse would not qualify for the ACA’s new tax credits. In contrast, if the couple is unmarried and spousal coverage is, therefore, unavailable, then the uninsured party (i.e., not a legal spouse) would qualify for the tax credit if he or she were otherwise eligible. These couples, though, can claim their medical insurance expenses if they itemize deductions. However, taxpayers under 65 can deduct only those medical expenses that exceed 10 percent of their adjusted gross income, and they can only do so if they itemize.. Compared to the excess medical deductions, the ACA tax credit is a larger benefit because the deduction is limited to the total income after all other deductions and the credit is available as a refund when the income tax is less than the total credit.
Of course, married couples receiving ACA tax credit will have to file jointly. If a couple were to get married and claim the new tax credits under the ACA, then the ACA rules require them to file a joint return for the respective tax year. This is pretty typical: Most tax credits and deductions have the same rules as the ACA tax credit if the taxpayer is married – you must file a joint return to receive the tax benefit.
Suffice it to say, marriage is incredibly complicated – and these are just the tax and ACA issues! For these reasons, we encourage you to seek tax advice from the tax professionals who understand the ACA (ahem, that’d be us). Beginning this tax season, Jackson Hewitt will provide all tax customers with free ACA assistance regardless of where they live or which program for which they may qualify.
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* Centers for Disease Control and Prevention, National Center for Health Statistics, “Births, Marriages, Divorces, and Deaths: Provisional Data for 2009,” National Vital Statistics Report (No. 58, Vol. 25), August 27, 2010, available at http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_25.pdf, accessed January 14, 2014.
** See, e.g., Average Engagement Length, And Other Wedding Planning Statistics (INFOGRAPHIC), Huffington Post, January 4, 2013, available at http://www.huffingtonpost.com/2013/01/04/average-engagement-length_n_2411353.html, accessed January 13, 2014.
*** For reference, the nonpartisan Tax Policy Center of the Urban Institute and Brookings Institution has a “Marriage Bonus and Penalty Calculator” available at http://taxpolicycenter.org/taxfacts/marriagepenaltycalculator.cfm, and they published an excellent brief on this topic at http://www.taxpolicycenter.org/taxtopics/Marriage-Penalties.cfm. While dated, the Congressional Budget Office also published an provocatively-titled report, “For Better or for Worse: Marriage and the Federal Income Tax” (June 1997), which is available at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/0xx/doc7/marriage.pdf.