Though the United States now has 13 states that legally permit gay marriage, same-sex couples have faced unequal financial hurdles at the federal level, which equate to significant costs in terms of estate planning, taxes, and policies around retirement and Social Security benefits. With the historic June 26 Supreme Court decision to repeal the 1996 Defense of Marriage Act (DOMA), which essentially said that even legally married gay couples at the state level weren’t recognized as such at the federal level (and weren’t entitled to its marriage benefits), improved financial rights for gay Americans are now here.
But what does the DOMA ruling really mean for the financial future of legally married gay couples — and what problems doesn’t it solve? Minyanville sought the expertise of Anna Pfaehler, a certified financial planner with Palisades Hudson Financial Group
, for the straight talk on the financial impact of the DOMA repeal.
Joint income filing on federal tax returns.
Before Wednesday’s DOMA ruling, legally married same-sex couples had to complete separate income documents to file federal taxes. Aside from the inconvenience, the inequality had implications for other tax-related financial matters, including mortgages and education-related financial aid for the children of gay couples. Pfaehler explains that though partners can now file joint federal income tax returns, they should still consider whether it’s actually the most beneficial financial strategy, based on income. (If one spouse doesn’t work, or makes significantly less income, for example, joint filing may be beneficial, but could also result in the loss of some tax credits available only to lower income earners). Run both scenarios to determine which filing method proves to be most beneficial. Consider amending previously filed returns for the years 2010, 2011, and 2012 only if the amendment reduces the overall tax bill.
Changes to insurance tax.
When legally married traditional couples have a spouse on their health insurance plan, the benefit is tax-free. Until Wednesday, gay couples in state-recognized marriages had to pay federal income tax on the employer contribution to their partner’s health insurance premium. Now, it’s a tax-free benefit for them as well.
Eligibility for the estate tax marital deduction.
Before Wednesday’s ruling, only traditional married couples could defer some estate taxes if a spouse died. Because the federal benefit did not apply to same-sex couples, assets of $5 million or more were subject to a 35% taxation rate. “Property passing to a surviving partner upon death is no longer subject to the federal estate tax, and a surviving partner can use the deceased’s remaining lifetime exemption upon his or her own death,” says Pfaehler.
Transfers aren’t subject to federal gift tax
. Gay partners can now transfer an unlimited amount of property between each other without being subject to the federal gift tax. Considering that even purchasing a car for a spouse or adding the name of a gay partner to a property deed previously triggered a tax, the change is a huge financial gain for same-sex couples. Additionally, Pfaehler says partners can now “gift split,” which is a benefit when gifting to a third party. She provides the following example scenario: If John buys his niece Julie a $30,000 car for her high school graduation, it is a taxable gift, but the government gives John an annual exclusion amount of $14,000 in gifts before being subject to gift tax. Now that John and his married partner Tom have the legal right to split the gift, each has given Julie $15,000, or half the value of the car. Both John and Tom can apply their annual exclusion amounts and reduce their total taxable gifts by $14,000.
No more tax penalty on an inherited IRA.
While more retirement plans have begun to allow surviving partners in same-sex marriages to receive assets from a 401(k) and convert them into an inherited IRA to minimize taxes, a federally recognized marriage was required to defer distributions. As a result, the tax implications of inheriting an IRA were significant. “With the DOMA repeal, partners who inherit an IRA from a spouse can postpone required minimum distributions until the year he or she reaches 70 ½ -- and the assets will continue to grow tax-deferred until withdrawn from the IRA,” says Pfaehler.
Entitlement to spousal and survivor Social Security benefits.
Previously, Social Security benefits were not available to surviving partners in a same-sex marriages, which was particularly crippling in cases where one partner may have had smaller or no benefits based on his or her earning history. Now, a partner is entitled to receive spousal and survivor Social Security benefits, just as traditional couples have received in the past.
What Should You Do Next?
Though the DOMA overturn helps to level the financial playing field for same-sex couples, it’s not all encompassing -- and doesn’t apply to every gay person in America. (For example, whether same-sex couples in civil unions and registered domestic partnerships can file joint returns is still unclear). “These rights are extended to same-sex couples that are legally married and residing in one of the 13 states (or Washington, DC) that recognizes their marriage. Who can and cannot marry is a state issue that is yet to be resolved,” says Pfaehler.
Furthermore, she explains that though the change may mean same-sex couples are newly entitled to tax refunds or other benefits they were unable to claim in the past, there are limitations on the time period claims can be brought forth. Don’t wait to find out what the DOMA decision can mean for your finances; seek out financial and legal advisors who specialize same-sex estate planning to ensure the professional is abreast of the new changes. In addition to Pfaehler, Palisades Hudson founder Larry Elkin (CFP, CPA) has closely followed the issues surrounding financial planning for same-sex couples for years. ( In fact, he wrote the first comprehensive financial planning book for unmarried couples
in 1995). Larger financial institutions like (Bank of America Corp
(NYSE:BAC), Wells Fargo & Co
(NYSE:WFC), and Northern Trust Corporation
(NASDAQ:NTRS) also have special lines of business dedicated to the different financial needs of same-sex couples.
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