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A new report released Wednesday lists the states with a marriage penalty on citizens’ income taxes.
The Tax Foundation, a non-partisan policy think tank, lists 15 states that penalize couples for being married.
Minnesota is one of those states. North Dakota and Wisconsin join the state in punishing marriage.
What exactly is the marriage penalty? In Minnesota that means a married couple pays more in taxes than they would if the husband and wife could each file and pay the tax on his or her own income.
The problem comes from the fact that combined higher incomes pay a higher rate of tax and have less in deductions than single filers. A 1999 Minnesota law only partially remedied the penalty.
The Tax Foundation’s website describes the overall impact: “This is discriminatory and has serious business ramifications. The top-earning 20 percent of taxpayers is dominated (85 percent) by married couples.”
The disparity in treatment of married couples also threatens the future of businesses, the Foundation says, “This same 20 percent also has the highest concentration of business owners of all income groups. Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses,” which means they pay a disproportionate amount of taxes.
The marriage penalties can affect the three-quarters of pass-through businesses that are sole proprietorships. These businesses do not directly send part of their profits to the Internal Revenue Service (IRS).
The profit is “passed through” the business onto the tax returns of the business owners. And those are subject to the marriage penalty in Minnesota.
The Minnesota Department of Employment and Economic Development has an online page on sole proprietorships. Under the “Tax Considerations” heading, there is no mention of the marriage penalty.
The rare exception to the penalty is a couple who before marriage have one person making, say, $60,000 and the other without an income or with a minimal salary. They marry and automatically enjoy a better tax bracket, standard deduction, and personal exemption.
Business attorney Aaron Hall in Minneapolis says the latter couple could save hundreds of dollars a year. But once the non-earning spouse starts to make significant income, the penalty starts negating the savings.
Economist John Phelan at the Center of the American Experiment in Minneapolis says that eliminating the marriage penalty is one of five reforms to boost the Minnesota economy.
“They are not huge changes such as cutting our corporate and income tax rates would be, but they could draw bipartisan support and would move us in the right direction,” Phelan explains in an online article from earlier this year.
The other reforms involve using the less complex federal system for depletion deductions, nixing the alternative minimum tax for corporations and individuals, and abolishing Minnesota’s estate tax.
Phelan notes the big picture in his analysis.
“Since 2020, Minnesota has slipped a place, to 46th, on the Tax Foundation’s 2021 State Business Tax Climate Index. This was largely driven by our state’s high corporate tax rates – where we rank 6th highest in the United States – and our individual taxes, where we rank 5th highest.”
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