How Financial Planning Has Changed for Same-Sex Couples
Retirement & estate planning strategies are being greatly altered.
By Greg OLIVER
When the Supreme Court affirmed the legality of same-sex marriage in June, its ruling profoundly altered the financial planning landscape for gay and lesbian couples – resulting in some “night and day” differences.
Yet in looking at the financial “before and after,” same-sex spouses and their advisors must also consider the “when and where” – because the Supreme Court ruling only applies to the 13 states that allow same-sex marriage (and the District of Columbia). Gay and lesbian spouses are still waiting to see if financial benefits will be granted in all 50 states.1,2,3
Here is how the landscape has changed for married gay and lesbian couples in states recognizing same-sex marriage.
Income taxes. When DOMA was in effect, same-sex spouses couldn’t file joint federal tax returns. Now they can. Filing jointly does not always result in a tax savings; for an extremely high-earning married couple, it can be a bad idea. Right now, single tax filers can earn up to $400,000 before entering the 39.6% tax bracket; a married couple will enter it when their combined incomes surpass $450,000. Still, same-sex couples are welcoming the option.4
Previous to the ruling, married same-sex couples faced a kind of “un-marriage penalty” in states without community property laws when one spouse far outearned another. In such cases, their federal tax bills were often higher than those of married straight couples. Qualifying for head-of-household status was difficult, as the higher-income spouse had to try to claim the other as a dependent. This was a no-go in community property states, in which the lesser-earning spouse’s gross income stood little chance of falling below under the dependent exemption amount.5
The federal government often doubles or significantly raises the AGI threshold on tax law benefits for joint filers – benefits such as the Child Tax Credit, the qualified student loan interest deduction, and the taxable income exclusion of the gain on the sale of a primary residence. In addition to these benefits, a spouse in a same-sex marriage now gains the ability to deduct medical expenses and qualified tuition expenses incurred by the other spouse.5
Now that the chance to file jointly is available, could married same-sex couples get a federal tax refund by filing amended 1040s for the past three years of returns? It may be worth consulting an accountant to find out.
Social Security. Low-income spouses in same-sex marriages (think stay-at-home moms and dads) now have the chance to claim Social Security spousal benefits. If the other spouse passes away, being able to receive his or her larger Social Security payments could make a significant income difference. Another implication from the Supreme Court ruling: surviving spouses in a same-sex marriage could also be able to collect a deceased spouse’s federal or military pension.1,4
Estate & gift taxes. Before the repeal of DOMA, life insurance was a core estate planning tool for wealthier same-sex couples. Sometimes an irrevocable life insurance trust containing a “Crummey provision” was created. Now, married gay and lesbian couples may want to reevaluate such insurance coverage because surviving spouses in same-sex marriages won’t have to pay federal estate tax on any inherited assets.2,5
A spouse in a same-sex marriage can now make unlimited tax-free gifts to the other that will not count against the $5.25 million lifetime gift tax exclusion, as long as the spouse receiving the gifts is a U.S. citizen. Same-sex married couples are now able to gift $28,000 worth of property tax-free, per year, per recipient, just as straight marrieds can; previously, spouses in same-sex marriages were looking at the individual limit of $14,000. (This is not to be confused with estate taxes some individual states require from their residents.)6
IRAs & 401(k)s. A surviving spouse in a same-sex marriage can now roll inherited IRA assets into their own IRA (provided they are named sole beneficiary of those assets). This opens the door for stretch IRA strategies among same-sex married couples. With federal recognition of gay and lesbian marriages, a surviving gay or lesbian spouse will have the ability to automatically inherit a 401(k) account unless that default beneficiary choice has been declined in writing by the accountholder.1,2,4,7,8
Workplace health benefits. Gay and lesbian couples are in line to save some tax dollars in 13 states and possibly others. Couples had to pay taxes on these benefits when DOMA was in place, even in states that recognized the legality of their marriages. Same-sex couples may wish to “shop around” and determine which employer offers a better or cheaper health plan.4
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1 – foxbusiness.com/personal-finance/2013/06/27/doma-and-financial-planning/ [6/27/13]
2 – newsok.com/a-financial-checklist-for-same-sex-couples/article/feed/562121/ [7/3/13]
3 – articles.latimes.com/2013/jul/06/nation/la-na-adv-gay-marriage-benefits-20130706 [7/6/13]
4 – business.time.com/2013/06/27/how-the-doma-ruling-will-affect-gay-couples-finances/ [6/27/13]
5 – fpanet.org/journal/FinancialPlanningRoadmapforNontraditionalCouples/ [7/18/13]
6 – nolo.com/legal-encyclopedia/reduce-estate-tax-by-gifts-30095.html [7/18/13]
7 – nolo.com/legal-encyclopedia/naming-non-spouse-beneficiary-retirement-accounts.html [2/6/13]
8 – schwab.com/cms/P-1625576