When your father took you aside long ago for a heart-to-heart talk on the subject of marriage, he may have said something about “give and take.” He may have even mentioned love and sex. But he surely never told you the facts of tax.
How the IRS Screws Singles
Marriages may come and go, but one partnership that never ends is your lifelong affair with the Internal Revenue Service. Here is an “I give-you take” relationship in which not even in death do you part. After all, Mrs. IRS is everyone’s widow and will be hanging around after your funeral to collect the spoils of your estate.
Father certainly never explained that the tax system favors the married and that one of the many happy returns of wedded bliss is the one you do your taxes on. In marriage we share our sorrows and joys. We also share our incomes for tax purposes. As a result, a married man whose wife doesn’t work pays up to 20 percent less federal income tax than does a single man earning exactly the same. A single man making $100,000 taxable income becomes a member of the 70 percent bracket, but the married man doesn’t get admitted to the club until his table income hits $200,000.
(The bias against single people runs deep. The state of Arkansas once actually had a bachelor’s tax. Every unmarried male twenty-one years or older had to pay a yearly tax of $100, which supposedly was used for supporting illegitimate children.)
Here’s an example of the kind of discrimination against single taxpayers that thrives right in the federal income-tax schedules: Joe had a net taxable income last year of $32,000, which put him right under the 50 percent bracket. He is single; so his taxes for 1975 came out to $10,290. But if he were married, he could file a joint return with Mrs. Joe and reduce his taxrate. Assuming that Mrs. Joe doesn’t have an income, Joe would pay only $8,660 tax that year. So Joe’s tax bill as a single person is $1,630, or 19 percent more than he’d pay as a married man. There must be many a marriage made in tax haven.
If you’re single or divorced you really pay for it. But, believe it or not, some politicians are trying to wrench the revenuer’s hand from your pocket.
Allowing married couples to file joint income-tax returns was not made a federal law until 1948, overriding a veto by President Truman. Here is how it happened. In the “community property” states out west, each spouse is by law half owner of the couple’s total property. Therefore, husband and wife were permitted to split their income for tax purposes since 1913, the year the first income tax went into effect. Married people in other states, sensing that they were missing out on something, persuaded Congress to let them in on the deal. The result was grossly unfair tax tables. Until the tables were revised in 1969, single people in the U.S. were paying up to 42 percent more taxes than married people were.
Only six other countries impose a greater burden on the single taxpayer. With the exception of the Netherlands, these countries — Spain, the Soviet Union, Poland, Rumania, and Czechoslovakia — are all dictatorships. Even Italy, which doesn’t let its citizens get out of a marriage very easily, at least doesn’t push them into one by taxing them extra for being single.
Sanford Amdur, a Newark-based tax attorney, relates a true tale of a tax beating taken by a couple “living together.” The man has been living for years with his girlfriend and her daughter, a twenty-one-year-old full-time college student. He cannot file a joint return with his girl friend because their “common law” marriage is not recognized in his state. He also cannot file a return as head of household because his girl friend’s daughter is not his dependent and because he is violating local law (i.e., fornication). Without getting into exemptions and credits, this man, whose taxable income last yeas was $140,000, shelled out $81,090 to Mrs. IRS, $5,370 more than he would have paid if he’d used the head-of-household schedule.
New York Rep. Edward Koch and Oregon Sen. Bob Packwood have introduced bills in Congress that would allow single people to figure out their taxes on the same tables that married people use when filing jointly. (An earlier single-taxpayer bill as introduced in 1982 by Connecticut Sen. Abraham Ribicoff but did not pass.) Patty Calvin, executive director of the Committee Of Single Taxpayers (COST), a lobbying group, said that the new bill has the support, said that the new bill has the support of more than half the House and half the Senate but that “we can’t pry the bill out of the Ways and Means Committee and the Senate Finance Committee.”
Of course, not everyone in congress is thrilled with the idea of giving single people equal tax treatment. Some share the sentiments of former Sen. Wallace Bennett of Utah, who called it a “live-in-sin bill.” But supporters of the bill note that the nation’s burgeoning single population of 40 million includes 12 million widowed and 5 million divorced people who have already suffered enough in a situation that was probably not of their making. Besides, who is to pass judgment on the remaining 23 million Americans who never took the plunge, some of whom may even be virgins?
Opponents of the bill also see giving tax advantages to married couples as a way of helping to support children and keep the family together. But Keith Gray, chairman of Washington-based COST and vice-president of the Hill and Knowlton public-relations firm, answers that assertion this way: “If the only way we can hold marriages and families together by tax considerations, that’s not saying much for the marriages.” He further notes the obvious — that getting married is a choice and that giving people tax breaks for it “is like saying if you decide to drive a Rolls Royce and I drive a Ford, you should pay less taxes.”
In any case, children cost the same when their parents break up. Although divorced and widowed taxpayers get the same deductions, for dependents as do married people, the tax schedules still give the married a better deal in terms of their tax rate. The great unfairness remains that the single parent pays taxes at a higher rate than does the married woman with no children. And those in the single-parent boat are getting ever more crowded. More than a million marriages in the United States broke up last year (nearly three times the number in 1950), involving probably more than a million children under the age of eighteen.
Congressman Koch, himself single, says that the way of taxes to reflect responsibilities for dependent support “is through exemptions for dependents, not through different tax schedules.” He also notes that the tax rates for married couples make no distinction between a couple with no kids and a couple with four.
But there’s a third, more cynical, reason why Congress is hesitant about giving single taxpayers equal status. If single people pay less taxes, married couples will have to offset the cuts by paying more . They won’t like that. The differential between what married and single Americans paid in income tax last year was an awesome $21.5 billion, according to a Brookings Institution study. It’s also been estimated that some $450 billion of the public debt can be traced to the lower tax rates applied to married couples.
Patty Cavin said that when she and Keith Gray went to speak with Ways and Means Committee Chairman Al Ullman last June about the status of the bill, the representative told them that he felt present tax policy toward single people is unconstitutional, as was past discrimination against blacks and women. But Ullman then added, according to Cavin, that this is election time, and it would be difficult, if Congress now raised taxes, to make up for the drop in revenues that would result if singles used the married taxpayers’ schedules.
So things don’t look very good at present for Joe Single. But there is also a great irony in the fact that certain married couples also get a royal screwing taxwise. This occurs when both halvers of a couple make about the same income. For these unfortunates, the tax schedules are worked out in such a way that the two of them end up paying more taxes as a married couple than they would as singles. And it makes little difference for married taxpayers whether they file a joint return or separate returns. It couldn’t have been all that easy to milk at the same time two American sacred cows — marriage and the work ethic. Patty Cavin says that an estimated 10 to 15 million married Americans are in this bind. (Cavin herself suffered from this “double taxation” when her husband was alive. Now a widow with two teenage sons, she is overtaxed as a single.)
“A married man whose wife doesn’t work pays up to 20 percent less income tax than does a single man earning exactly the same.”
While overtaxed married couples do have their problems, single people still pull the short straw when it comes to heir tax burden. Death may be a way out of some problems, but taxation isn’t one of them. Attorney Amdur, himself single, thinks that athe inequities in the laws governing estate taxes are even worse than the inequities found in the schedules.
Since “you can’t take it with you,” Mrs. IRS figures you can leave it with er — and your wife — but your mistress need not apply. What Mrs. IRS does is this. If you are married and you die, she won’t tax much of anything you’ve left to your wife. This “ untouchable ” part of your estate can be as much as half of the total gross after it’s been adjusted for such things as claims, debts, and funeral expenses.
On a married man SQ s adjusted gross estate of $320,000, the net federal estate tax will come to about $20,140 if the “marital deduction” is used. The estate of a single taxpayer with the same adjusted gross estate, $320,000, will be taxed about $64,660. The result is that the single man’s estate will be taxed a whopping $44,640 more than the married man’s after each has taken the $60,000 exemption that everyone’s allowed. Many single people might want to fight this, but when the injustice finally comes up, they’re in no position to do anything about it.
The “marital deduction” was put into law to give all married couples in the United States equal footing with those in the community-property states, where each spouse has equal ownership of the couple’s property. However, the rationale for the deduction is also that it gives the husband or wife credit for contributions made to the family fortune that were not paid for monetarily. On family farms in particular, the wife often puts in a full day without ever seeing a paycheck. Because some families have had to sell their farms to pay off estate taxes, President Ford, with much support in Congress, has proposed that husbands and wives be allowed to leave not just 50 percent of their estates but all of it tax-free. At the same time, such a tax break would finance a few more lunches at La Grenouille for ladies still living off the rewards of sending in joint returns with their late husbands. So why don’t they think of making an exception for farm families rather than singling out the single?
Here’s one bizarre case involving the “marital deduction” that recently appeared in the Wall Street Journal. Several years ago Amy McGinnis married Charles F. Spalding. (Spalding’s friend, Sen, Edward Kennedy, was witness at the wedding.) Afterward, a court in New York declared as invalid Spalding’s divorce, several years earlier, from his first wife, because they had been legal residents of New York and the divorce took place in Nevada. So when Amy McGinnis died a year after the marriage, the tax court said half of her estate couldn’t go to Spalding because they weren’t really married. The amount of the marital deduction involved here returns something to the tune of $1.1 million, and if Spalding loses an appeal, Amy’s estate may be taxed almost an extra half a million dollars.
Another area rife with discrimination against the unwed is the Internal Revenue Code sections that deal with “gifts” people make and how they are taxed. Everyone starts off as an equal. Each person gets to give away $3,000 a year tax-free to each recipient. If you want to give more than $3,000 to someone in a given year, you can start digging into your lifetime exemption of $30,000. In other words, you can give away $3,000 a year to every recipient plus an additional $30,000 over your lifetime before the tax man makes his entrance.
Married people, again, are a little more equal than others. Before even considering the annual exclusion and the lifetime exemption, a married man can give away, tax-free, half of any gift designated for his wife. Watch what happens when Joe Married gives $44,000 to his wife and Joe Single gives the same to his girl friend. First Joe Married cuts the amount of the gift in half (for tax purposes), since it’s for his wife. He now has only a $33,000 gift left to pay taxes on. From this he subtracts his annual exclusion of $3,000 and then his lifetime exemption of $30,000 (we assume he’s never used any of it). And presto, his gift has disappeared as far as the tax man is concerned.
Now Joe Single can subtract from his gift of $66,000 his annual exclusion of $3,000 and his lifetime exemption of $30,000, and still he has to pay taxes on $33,000 worth of gift, These taxes come to a hefty $2,655.
The part of the code that deals with gifts made to a third party gives married people an even bigger advantage. Here not only can the husband use his annual exclusions and lifetime exemption, but he can also use his wife’s exclusions and exemption, even if not a cent of the gift came from her pocket.
Suppose we have a wealthy couple that wants to give money to their three grandchildren. They can first give each grandchild $6,000 a year (annual exclusions) tax-free. They can then give away their lifetime exemptions, which combined amount to $60,000. In sum, they can give away $78,000 to their first three grandchildren in the first year of gift giving and $18,000 a year thereafter without paying the gift tax.
A widow is not so fortunate. She can give each grandchild only $3,000 a year plus the $30,000 one-shot, lifetime exemption. So the first year she gets to give away only $39,000 tax-free to her three grandchildren and $9,000 annually thereafter. The tax people get her in three ways: (1) She can give away less money tax-free. (2) If she gives the same-sized gifts as does the married woman, she not only pays taxes on more of the gift but also pays taxes at a higher rate, since gift taxes are graduated. (3) If she decides to give away less money because of the tax disadvantages, her estate will remain larger than the married woman’s and will in the end be taxed more (also on a graduated scale) when she dies.
Taking a loss on stock is a little less painful, because tax deductions are the medicine that helps heal our wounds. And taking a loss on a small business stock is even less painful to married people, because their tax deductions are even more powerful. In fact, they’re a double dose.
The Internal Revenue Code gives a fairly complicated definition of a “small business,” but generally it involves a modest operation, such as a movie theater, a gas station, or a bakery. If we lose money when we sell or exchange stock of a small business, we each may deduct a loss of up to $25,000 from our income in the year the loss occurred. The result: lower taxes.
For example, Ralph and James each invested $250,000 in a small-business stock, which they sold this year at a loss of $75,000 each. Let’s assume both of their 1976 incomes amounted to $100,000. James, who is single, deducts his $25,000 and ends up with a taxable income of $75,000. But Ralph deducts not only his $25,000 but also his wife’s $25,000 (even though she had nothing to with the investment) and ends up with a taxable income of only $50,000. James, therefore, must pay taxes on $25,000 more income than must Ralph. Since he’s in the 50-percent tax bracket, James pays an additional $12,500 in taxes.
James is furious at this injustice, and he sees his anger increase as he considers his social-security taxes. James and Ralph both make the same good salary. Both get the same social-security tax withheld from their pay. However, when they retire, they are not going to get the same benefits plus 50 percent more for his wife, who never worked a day in her life. And why should she? If Ralph’s wife had worked, her employer would have take out the full social-security tax and she’d get all that’s coming to her upon retirement. This wa she gets 50 percent of the benefits and doesn’t have to work.
Attention, all politicians: you,too, have a stake in getting equal tax treatment for your constituents. Single taxpayers are handicapped in an area more sensitive to your needs, their political-campaign contributions. Every taxpayer can deduct up to $25 of a political contribution from his taxable income or take a tax credit for one-half of the contribution up to $12.50. But as usual, we may double the deduction or credit when we are considering a married couple. Of course, we’re talking about small change here. But since a husband can’t vote on behalf of his wife, why should he make her political contributions?
So far single taxpayers haven’t pushed very hard for fair taxes, says Bob Weinstein, head of Le Jungle, because up until recently being single wasn’t considered a terminal condition. But with more single people around and more planning to stay that way, pressure is building Congress to do something about unfair taxes.
The most vocal taxpayer group has been COST, formed in 1971 to lobby mainly at the grass-roots leve. Gray, who was secretary to the cabinet under President Eisenhower, is the group’s lobbyist in Congress. The organization’s advisory board is chaired by a political odd couple — former Senators George Murphy of California and Eugene McCarthy of Minnesota. The list of COST’s sponsors read somewhat life a hybrid of the Hollywood and Manhattan phone books.
The patron saint of the movement for equal taxation is the late Vivian Kellems, A divorced businesswoman who ran a tool plant in Connecticut, Kellems refused to withhold taxes from her employees and, to protest the unequal treatment for single taxpayers, would not pay her own. COST’s Cavin said that when Kellems turned in her tax papers, she “ signed her name and did not give one dame figure. ” Beyond that, she sent the Treasury a bill in 1971 for $76,000, which she claimed represented taxes taken “illegally” from her for twenty years. She’d probably still be in tax court if she hadn’t died last year at the age of seventy-eight.
I’d hate to see what Mrs. IRS did with her estate.
Death and Taxes. Those are the two things none of us can avoid, right? Depending upon how you wish to handle your “stuff” after you no longer need it, you may in fact win the battle on the taxes part of that. If you have bequests, though, the government will outlive you, and they will eventually take whatever they have decided represents a fair amount. Of course if you happen to be not all that fond of your heirs, and you want to get in one final kick from the grave, you should probably get in as much IRS trouble as you can right before you die. Just sayin’…
Also, do remember this published originally in 1976, so tax rules have changed. Screwing with the IRS has not changed all that much, though, so you just need to get some different baselines in mind before coming up with your strategy. … If you’re not all hyped up on the whole “love” thing, getting married can still save you a bunch of money.
