Lower Income, More Tax Penalties, Research Says

A recent Congressional Budget Office report found that low-income earners face harsh tax penalties. The report found 37 percent of low-income earners face a total marginal tax rate of 30 to 39 percent. Further, 20 percent of low-income earners face a total marginal tax rate of 40 percent or more. To put these figures into perspective, the 33-percent tax bracket for 2014 is applied to single taxpayers with income over $226,850.

The Congressional Budget Office report considers a number of factors and tax penalties to arrive at the conclusion that low- and moderate-wage earners face high tax penalties. In addition to the standard tax rate, state income taxes and the affects of combined income were calculated.

The effects of combined incomes is often debated and referred to as a marriage tax penalty. Taxpayers are considered to be affected by the marriage tax penalty if combining incomes results in more tax penalties than if two taxpayers were to file separately, with a single filing status. For example, if one spouse earns a high income but the other spouse makes minimum wage, the lower income is taxed at a rate far higher than if the spouse with a low income was single, because combined household income determines the tax rate for the household when spouses file jointly.

One of the newest—and most controversial—tax penalty that affects low-income wage earners is a result of the Affordable Care Act. If a taxpayer does not purchase health insurance by the designated deadline, a tax penalty is imposed. The tax penalty is $95.00 for an adult or 1 percent of income, whichever is greater. For example, someone who makes $28,500 would end up with a tax penalty of $285, which is 1 percent of that income. For low-income taxpayers, the burden of paying monthly premiums or an annual tax has a significant affect on finances. However, to get an exemption, the cost of health insurance must be over 8 percent of a person's income, which again, puts a strain on finances, especially for low-income families.

Another potential marriage tax penalty arises when low-income wage earners marry—they receive a lower Earned Income Tax Credit or make too much to qualify for the credit altogether. The Earned Income Tax Credit amount is determined by income level, with taxpayers who earn less receiving a higher credit. Consequently, some families with two wage-earners are essentially penalized for being married.

Clearly, progressive tax rates affect taxpayers who get married, effectively penalizing some families that have two wage-earners. Other taxes, such as tax that is imposed on taxpayers who do not purchase health insurance, only compound the problem for low-income taxpayers who cannot afford premiums. Without higher income thresholds for married tax payers and tax credits that are available to all low-income families, the trend of tax penalties and high taxes for low-income taxpayers will continue.

(Photo courtesy of Stuart Miles / freedigitalphotos.net)