So How Did The “Marriage Penalty” End Up in the Home Buyer Tax Credit?

So why has the “marriage penalty” become an issue in the last month? After all, the home buyer tax credit goes back to 2008, and the IRS has always required that both spouses be eligible in order for the couple to claim the tax credit.

We started to wonder about that this week, when someone asked why we had not raised it before.  The answer is simple: the most egregious applications of the “marriage penalty” come from the long-time homeowner tax credit, which did not exist until early November.  Here’s why.

When the home buyer tax credit only applied to first-time home buyers, and the IRS required that both spouses qualify as first-time home buyers, it seemed unfair but not inconsistent with general IRS requirements involving spouses.  The IRS tends to treat married couples as a joined entity (which makes sense), so it was not unusual for the tax code to require both spouses to be eligible in order for the couple to claim the tax credit. Now, that might still be unfair, especially since unmarried couples can claim a tax credit even where one partner is ineligible, but it did not raise any real complaint prior to November 2009.

But when Congress created the long-time homeowner tax credit, it created a new situation: two different tax credits (one for $8,000, and one now for $6,500) with two different eligibility requirements. Unfortunately, in creating the new tax credit, no one considered a situation in which a married couple might involve two spouses who would qualify for two different types of tax credits.  Why?  Because the situation had not come up before, when there was only one way to qualify.

Essentially, what happened was that Congress simply added amending language to the original legislation, which only provided for a first-time home buyer tax credit. That original legislation made clear that both spouses needed to qualify as first-time homeowners. And the new legislation made clear that both spouses had to qualify as long-time homeowners.  Both provisions, on their own, are fair enough, under the general sense that spouses are often treated as one entity in the tax code.

Indeed, the legislation itself only mentions spouses in passing as part of the central definitions for eligibility based on ownership history. The original legislation from 2008 states the requirement for first-time home buyer qualifications as follows: “any individual if such individual (and if married, such individuals spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.”

Similarly, the November 2009 legislation that added the long-time homeowner credit just states: “In the case of an individual (and, if married, such individuals spouse) who has owned and used the same residence as such individuals principal residence for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, such individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence.”

So now the IRS looks at the legislation, and sees two things: (1) the legislation requires that a first-time home buyer (and spouse) have to both qualify as first-time home buyers; AND (2) the legislation requires that a long-time homeowner (and spouse) have to both qualify as long-time homeowners. So logically it follows that both spouse have to qualify either as a first-time home buyer OR a long-time homeowner, since Congress included no provision covering what would happen if one spouse qualified under the original legislation and the other qualified under the amended legislation.

That’s where the marriage penalty came from, a simple oversight in the drafting of the legislation. Congress took the simplest way to add the long-time homeowner tax credit by creating language treating such owners as if they were first-time home buyers, without considering the possibility that a married couple might contain two spouses who qualify for different types of tax credits.