Same-Sex Marriage and Taxes

The discussion continues and people are still debating the legal merits of the Supreme Court’s landmark ruling legalizing same-sex marriage. But there is one area people on all sides of the issue can agree upon—the ruling adds a lot of uncertainty to tax and property issues across the country.

At our tax law offices in San Diego, El Cajon and Orange County, we’re seeing more and more same-sex couples and working with them to settle tax issues since same-sex marriage was legalized in California in 2013.

For a lot of previously married couples, the newest court ruling simplifies federal and state tax filings and it allows them to take advantage of the more than 1,000 tax benefits available to married couples. But for Registered Domestic Partners (RDP) and some high-earning couples, it may mean a loss of benefits or tax advantages while employers will have to make some decisions as well.

For California RDP’s, the ruling does not affect the IRS decision not to classify the relationship status as “married.” If you’re in an RDP you still have to file as single.

Being married for tax purposes depending on a number of circumstances usually confers numerous benefits that same-sex couples can now uniformly take advantage of. The following are just some of the tax breaks available to legally married same-sex couples:

• The right to file a joint return, which can produce a lower combined tax than the total tax paid by same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners or one or both previously qualified to file as head of household).
• The opportunity to get tax-free employer-paid health coverage for the same-sex spouse.
• The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax.
•  The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse.
• The opportunity for the estate of the spouse who dies first to transfer the deceased spouse’s unused exclusion amount to the surviving spouse.
• The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse.
•  The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for non-spousal beneficiaries.

Of course there is a negative side as well.  Higher-income same sex couples could find themselves paying more by being married.

A taxpayer who is married and living with his or her spouse cannot file using head of household filing status. So a same-sex spouse (or both) who previously qualified for and filed a federal return using the head of household status will no longer file as head of household. Instead, the same-sex couple will file as married using the joint or separate status, which will generally result in higher taxes.

•  When filing as unmarried, one individual can take the standard deduction and the other can itemize. As married individuals, they must choose between the two, which could substantially reduce their overall deductions.
•  If a same-sex couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.
• As unmarried individuals, same-sex partners were able to adopt each other’s children and claim the adoption credit. As married individuals they can no longer do that.

On the employer side, the Supreme Court ruling could simplify employee benefits by equalizing both straight and same-sex marriage benefits but for companies that offer domestic partner coverage, the changing landscape can become quite complicated moving forward.

In the past 10-years a growing number of companies offered domestic partnership coverage for gay employees and their partners as a way to provide benefits for couples who could not legally wed. Other companies offered broader coverage, regardless of sexual orientation—recognizing the fact that not all couples prefer to wed.

Businesses that offer broad coverage may very well decide to keep those benefits intact while companies that offer only same-sex partnership benefits may begin to phase them out now that all can legally marry to avoid opening the business to reverse discrimination lawsuits.

But some experts say firms may keep domestic partnerships intact to help protect gay employees from discrimination. While same-sex marriage may be legal, the ruling doesn’t extend to employment law.

In more than half the states in the U-S, it’s still legally permissible to fire someone because of sexual orientation. Because marriage certificates are public, forcing somebody to marry strictly for benefits could effectively “out” them publicly while domestic partnerships are usually kept private.

As is always the case with sweeping court rulings such as this, a lot of uncertainty lies ahead. The best advice applies to both same and opposite sex couples who are either contemplating marriage or newly married. Sit down with your tax professional to discuss your financial situation and plan out a course of action.

If you have a particular concern contact the tax law professionals at RJS LAW today. Our team constantly stays updated on the latest tax issues and we can help you sort through your options. We have convenient offices in El Cajon, Orange County and San Diego and can help. For a free consultation call us at (619)-595-1655.