Tax Implications for Same-Sex Marriage

When The Defense of Marriage Act of 1996 (DOMA) was overturned this past June, legally married same-sex couples are now required to file their federal returns and state results as “married” since all states are now required to recognize and allow same-sex marriage.

Keep in mind, however, that being married for tax purposes is not always beneficial, depending on a number of circumstances.

Potential Tax Benefits 

• 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 to consent to make “split” gifts (i.e., gifts to others treated as if made one-half by each); and
• 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.

The “Marriage Penalty”  

You may find that filing as married could have unpleasant income tax ramifications for same-sex married couples. Divorcing before the end of the year can rectify that. However, before employing that strategy, a couple needs to consider the other financial benefits of being married. The following issues are commonly encountered by same-sex married couples.

• 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.
• If you are filing as unmarried, one person can take the standard deduction and the other can itemize. However, 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.

Please give us a call if you are contemplating a same-sex union or live in a state that previously did not recognize same-sex marriages and wish to explore the tax consequences of now filing as married individuals.