Who Is the Taxpayer

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Who Is the Taxpayer
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Marriage Penalty/Bonus
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Quantifying Penalty/Bonus

• According to a CBO report, in 1996
• Nearly 21 million couples had aggregate marriage
  penalties of about 29 billion and
• Another 25 million couples had aggregate marriage
  bonuses of about 33 billion.
• According to an OTA report, in 1999
• 48 of joint returns were expected to show an
  aggregate marriage penalty of 28.3 billion and
• 41 of joint returns were expected to show an
  aggregate marriage bonus of 26.7 billion.
• According to the OTA report, it was estimated
  that unmarried individuals would pay an aggregate
  singles penalty of 30.2 billion, with an average
  penalty of 746.

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Competing Policies

• Marriage neutrality a married couple pays the
  same exact tax as it would if each spouse filed
  separately reporting his/her respective income.
• Couples neutrality that married couples with
  the same taxable income should pay the same
  amount of tax, no matter how the income is split
  between the two.
• Progressivity that taxpayers who earn more
  should pay more tax because they have a better
  ability to pay tax.

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1 U.S.C. 7
Definition of "marriage" and "spouse" In
determining the meaning of any Act of Congress,
or of any ruling, regulation, or interpretation
of the various administrative bureaus and
agencies of the United States, the word
"marriage" means only a legal union between one
man and one woman as husband and wife, and the
word "spouse" refers only to a person of the
opposite sex who is a husband or a wife.
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Alimony
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71(b) Alimony or Separate Maintenance
Payment

• Any payment in cash,
• If the payment is received by a spouse under a
  divorce or separation instrument,
• If the instrument does not elect out of the
  inclusion-deduction regime of 71 and 215,
• If the spouses are not members of the same
  household at the time the payments are made, and
• If there is no liability to make payments after
  the death of the payee spouse (or a substitute
  for such payments).

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Front-Loading Formula

• EPT EP1 EP2
• EP1 P1 - (((P2 - EP2) P3)/2 15,000)
• If, however, EP1
• EP2 P2 - (P3 15,000)
• If, however, EP2

• EPT (P1 - (((P2 - EP2) P3)/2 15,000))
  (P2 - (P3 15,000))

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Frontloading Problems

• Alimony is paid in the amount of 50,000 in the
  first year and not at all thereafter.
• Alimony is paid in the amount of 40,000 in the
  first year and 10,000 in the second year and
  none thereafter.
• Alimony is paid in the amount of 60,000 in the
  first year, none in year 2 or 3, and 20,000 per
  year thereafter for the life of the payee.

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Problem 1

• 50,000 paid in year 1, none thereafter
• Excess payment for 2nd post-separation year
• 0, or excess of 0 (amount paid in 2nd year)
  over 15,000 (sum of amount paid in 3rd year 0
  and 15,000)
• Excess payment for 1st post-separation year
• 35,000, or excess of 50,000 (amount paid in 1st
  year) over 15,000 (sum of average of amounts
  paid in 2nd and 3rd years 0 and 15,000).
• In 3rd post-separation year, 35,000 (total
  excess payments) is included in income by payor
  and deductible by payee.

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Problem 2

• 40,000 paid in year 1, 10,000 in year 2
• Excess payment for 2nd post-separation year
• 0, or excess of 10,000 (amount paid in 2nd
  year) over 15,000 (sum of amount paid in 3rd
  year 0 and 15,000)
• Excess payment for 1st post-separation year
• 20,000, or excess of 40,000 (amount paid in 1st
  year) over 20,000 (sum of average of amounts
  paid in 2nd and 3rd years 5,000 and
  15,000).
• In 3rd post-separation year, 20,000 (total
  excess payments) is included in income by payor
  and deductible by payee.

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Problem 3

• 60,000 in year 1, none in year 2 or 3, 20,000
  thereafter
• Excess payment for 2nd post-separation year
• 0, or excess of 0 (amount paid in 2nd year)
  over 15,000 (sum of amount paid in 3rd year 0
  and 15,000)
• Excess payment for 1st post-separation year
• 45,000, or excess of 60,000 (amount paid in 1st
  year) over 15,000 (sum of average of amounts
  paid in 2nd and 3rd years 0 and 15,000).
• In 3rd post-separation year, 45,000 (total
  excess payments) is included in income by payor
  and deductible by payee.