Question

Kim and Kayne have been dating for years and are now thinking about getting married. As a financially sophisticated couple, they want to think through the tax implications of their potential union. a. Suppose Kim and Kanye both earn $71,000 (so their combined income is $142,000). Using the tax bracket information , calculate the combined tax bill that they would pay if they remain single, and compare that to the taxes they would pay if they were married and filed a joint return. b. Now suppose that Kim and Kanye both earn $102,000 (so their combined income is $204,000). Calculate the combined tax bill that they would pay if they remain single, and compare that to the taxes that they would pay if they were married and filed a joint return. c. What differences do you find in parts (a) and (b)? What is the cause of these differences? a. If Kim and Kayne remain single, their total tax bill will be $ . (Round to the nearest cent.)

Answer 1

(a) Individual Incomes = $71000, Total Income = $142000
If they pay taxes individually,
Tax liability for each = 9075 * 10% + (36900 - 9075) * 15% + (71000- 36900) * 25% = $13,606.25‬
Total Paid by them = 13606.25 * 2 = $27,212.5
If they pay joint taxes,
Total Tax liability = 18150 * 10% + (73800 - 18150) * 15% + (142000- 73800) * 25% = $27212.5
(b)
Individual Incomes = $102000, Total Income = $204000
If they pay taxes individually,
Tax liability for each = 9075 * 10% + (36900 - 9075) * 15% + (89350- 36900) * 25% + (102000 - 89350) * 28% = $21,735.75
Total Paid by them = 21735.75 * 2 = $43,471.5‬
If they pay joint taxes,
Total Tax liability = 18150 * 10% + (73800 - 18150) * 15% + (148850- 73800) * 25% + (204000 - 148850) * 28% = $44,367‬
In part (a), the tax liability remains same whether they pay the taxes individually or together. However, in case (b) the tax liabilities increases if they pay taxes together.
This happens because the tax brackets do not double when the income increases. For any individual income under $74425($148,850/2), the tax liabilities would remain the same. However if the individual income increases above $74,425, the tax buckets change for individual returns and collective returns.
For example, if the individual income is $80,000, which is greater than $74,425 but less than $89,350. In this case if the taxes are filed individually, the highest tax bracket will be 25%.But if joint returns are filed the highest tax bracket will be 28 %( 80000*2 = 160000, which lies in 28% bucket).

Taxable income Tax Rates Individual Return Joint Returns 10.0% $0 to $9,075 $0 to $18,150 15.0% $9,076 to $36,900 $18,151 to $73,800 25.0% $36,901 to $89,350 $73,801 to $148,850 28.0% $89,351 to $186,350 $148,851 to $226,850 33.0% $186,351 to $405,100 $226,851 to $405,100 35.0% $405,101 to $406,750 $405,101 to $457,600 39.6% Over $406,750 Over $457,600