Marriage penalty for wealthy couples in Washington state due to new millionaires tax.

When it comes to taxes, one issue that often arises is the marriage penalty. While this is sometimes a concern with federal income tax, it usually doesn't have a significant impact. This is because most tax brackets, deductions, and adjustments for married couples are twice the size of those for single individuals.

And even when there is a penalty, it typically only amounts to a few hundred dollars. However, the recently implemented Washington state millionaire income tax operates differently. Its mechanics actually create two marriage penalties that are quite noticeable in terms of dollars.

This is due to the fact that the tax is divided into two brackets and includes two deductions, which we will explore further. To truly understand this new tax, one would need to sift through a hundred pages of statutes, regulations, fiscal notes, and guidance. But for practical purposes, taxpayers can think of it like this: there are two brackets for income tax - the first $1,000,000 is taxed at 0 percent, while anything over that amount is taxed at 9.9 percent.

Additionally, there are two deductions available - one for charitable donations to in-state charities and another for gambling losses. In short, Washington's millionaire tax can be seen as a two-bracket, two-deduction income tax. However, hidden within this seemingly simple structure are two marriage penalties.

The first one is related to the $1,000,000 bracket. Typically, federal tax laws give married couples larger tax brackets. But in this case, the opposite is true.

Both single and married taxpayers have a $1,000,000 zero-percent bracket. This means that two single individuals who each make $1,000,000 would not have to pay the millionaire tax. But if they were to get married and still make the same amount individually, their combined income of $2,000,000 would result in a tax of $99,000.

Essentially, this is a marriage penalty. The second marriage penalty is connected to the charitable contribution deduction. While a $100,000 limit may seem generous to most taxpayers, it is not as significant for high-income individuals who are the primary target of this tax.

Single taxpayers can deduct up to $100,000 of charitable donations to in-state charities, and the same goes for another single individual. But if these two individuals were to get married, they would only have one $100,000 limit, resulting in a lost deduction of $100,000 and an increase in taxable income of the same amount. At a 9.9 percent tax rate, this would cost $9,900 - another marriage penalty.

It's important to note that people don't typically make decisions about marriage based on state tax rules. However, for those who are affected by the Washington millionaire tax, it's crucial to understand the calculations. This law not only taxes high-income married couples but also penalizes them more than it would if they were single.

While marriage penalties are often exaggerated in terms of ordinary federal income tax planning, this is not the case with Washington's new millionaire tax. The penalty is essentially built into the basic formula. For more information on Washington state's charitable deduction, including limitations, refer to the Charitable Deductions resource.

And for additional resources and details on the millionaire tax, check out Surprising Statistics of the New Millionaire's Income Tax, Washington State Residency Rules for the Millionaire's Income Tax, and the final signed version of the Washington State Millionaire Tax.