There is a renewed excitement about the acceptance of gay marriage in this country. The Supreme Court is hearing an important case and the topic recently made the cover of Time magazine. As the this Time magazine article noted, the tide is changing and many Americans are not only in support of gay marriage but many are looking forward to gay marriage being legal once again in California.
However, even if California legalizes gay marriage, the unfortunate truth is that gay marriage will still not be truly equal until it is recognized at the federal level. State level recognition for gay and lesbian couples does not translate to federal benefits and federal protections associated with marriage. Until it is, there are several financial issues that married gay couples need to be aware of and need to plan for.
- Inheritance laws differ greatly between heterosexual and same sex married couples. For example do not assume that since a same sex couple lives in a state where their marriage or civil union was recognized that they will inherit their partner’s social security benefits when their partner dies because this is not correct. The federal government’s refusal to recognize gay marriages and civil unions trumps state law and that means when one partner dies the survivor cannot inherit their partner’s social security benefits or other benefits provided to federal employees, including military personnel. Additionally, survivors have to pay taxes on inheritance of real estate and financial assets that heterosexual survivors do not when they lose their spouse. Each state has the ability to impose its own estate taxes and inheritance taxes however, not all do. Some impose one and not the other.
- There is great disparity when it comes to federal tax filing status and exemptions. Same sex married couples and registered domestic partnerships do not have the option of filing their tax returns as “married filing jointly” which in many cases is the optimal filing status because it results in paying lower taxes. They must file as single or head of household. For example if you and your same sex spouse have a child, one of you can claim that child as a dependent on your federal tax return. You may also be eligible for the child tax credit ($1,000 if your gross income does not exceed $75,000). If you provide more than 50% of the child’s support, you may be able to file as head of household, which usually allows you to pay fewer taxes than if you filed as single. If a couple has two children, each might be able to claim one child as a dependent and file as head of household on their federal respective tax returns.
- However, when it comes to filing state tax returns in California same sex married couples and domestic partners must fill out their state tax return as a married heterosexual couple and follow tax rules that apply to married couples. How then you may be asking, do you fill out your state return as a married couple when it asks you to plug in numbers from your federal return, which you filed as singles? In my experience, tax professionals suggest same sex couples prepare a dummy federal return, filled out as if you were married, and then use those figures to plug into your state return. Once you are done, you discard the dummy return. This significantly increases the time and money that gay and lesbian couples must spend on preparing tax returns, because they must prepare three federal returns.
- Another area of concern involves gift taxes. Heterosexual married couples are exempt from almost all federal taxes that are allotted to transfers of property or money between them. Not so for gay and lesbian couples, since their marriage is not recognized by the federal government at the present time. This means that same-sex couples must be aware of federal gift tax rules. Every person may give a lifetime total of up to $5.25 million (in 2013) without tax penalty. Once you exceed that limit, all further gifts, and anything you leave at death, are taxed. Annual gifts of $14,000 or less per recipient do not count towards this lifetime total. Heterosexual spouses are exempt from this tax — they can give any amount to each other and it doesn’t count as a gift. But gifts between same-sex couples do not qualify for this exemption. This can have a significant impact on gay and lesbian couples. If you make taxable gifts of more than $5.25 million, you will have to pay taxes on any future gifts. This tax can be huge… nearly 40% of the amount of the gift — and wealthy same-sex couples may be at risk of having to pay it. Are you aware that it can be very costly to put your same sex partner on the title to your home without receiving payment? The federal government considers this to be a gift of half the value of your home and this amount will count towards your lifetime gift total.
- On the federal level when it comes to death taxes-(estate taxes), heterosexual married couples have an unlimited marital deduction however same sex couples do not. As of the beginning of 2013 any estate under 5.25 million is exempt from federal estate tax and anything over that is taxed at 45%. Thus at this point a high net worth gay couple might expect to pay a boatload in estate taxes. There is a significant difference between same sex and heterosexual married couples with respect to taxes on employment benefits. When an employee, their heterosexual spouse, and their children receive health benefits through a job, the value of those benefits is exempt from tax by the federal government. However, if that employee is able to secure health benefits for a same-sex spouse or domestic partner, the federal government requires that the employee spouse report those benefits as taxable income.
These are all unfortunate inequities that many people straight and gay may not be entirely aware exist and will not be resolved until the federal government takes action.
Karen helps attorneys; mediators, individuals and couples, navigate through the financial morass of divorce and widowhood. Her expertise lies in understanding the special tax and financial issues that can plague divorce and she helps clients get their financial fair share and equitable settlements. She provides financial analysis, projections and solutions so clients can avoid long-term regret over decisions made early on in divorce and widowhood. Karen offers a range of financial, investment and insurance services that address clients’ complete financial picture and long-term needs before, during and after marriage. She is currently writing a book entitled, “To Have and To Hold Onto Your Financial Fair Share: Financial Decision Making When Marriage Ends in Divorce or Death.”
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