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July 14, 2015

Same Sex Marriage Tax Benefits: What You Should Know


same sex marriage tax benefitsSome background.

There have been two Supreme Court rulings in the last two years that have greatly affected the federal and state taxation of same sex marriages. On August 29, 2013 the Supreme Court struck down certain provisions of the Defense of Marriage Act (DOMA) and ruled in United States v. Windsor that the federal government must recognize same sex couples who are legally married under state laws.

On June 26, 2015 the Court ruled in Obergefell v. Hodges that all states must recognize same sex marriage. The federal government recognizes the marriage of a same sex couple if the marriage was legal where performed.

As a result of these two rulings, there are some same sex marriage tax benefits for you to consider for this and the coming years:

Filing jointly provides new tax credits.

Beginning in 2013, married same sex couples began filing joint tax returns or as "married filing separately" at the federal level because of the Windsor ruling. You also filed jointly at the state level if the state you resided in recognized your marriage. If you lived in a state that did not recognize your marriage, then you each filed as a single tax status in those states.

The Obergefell decision has changed the landscape yet again. Since all states must recognize same sex marriage, you will now be able to file jointly in the state in which you reside. If you have not been able to file jointly in the prior two years, and it would have been advantageous for you to do so, check your state's laws for the possibility of filing amended 2013 and 2014 state returns.

For those couples thinking about marrying in 2015 and later, the tax filing rules are the same as for all other married couples. You will file a joint tax return or elect to file separately as married persons. This applies to both federal and state. If you have children, the claiming of those children as dependents are simply listed on one return. You can use the child tax credit and perhaps the earned income credit as a few of the same sex marriage tax benefits.

Taxes on employment benefits vanish.

Prior to 2013, just heterosexual married couples were entitled to tax free health insurance benefits for their spouses and children through their job. Now, one of the very nice same sex marriage tax benefits, is that all married couples can receive this employer provided benefit exempt from federal and state taxes.

If your employer provided health coverage for your spouse and included that value in your taxable income for 2013 and 2014, you might consider the effectiveness of filing amended income tax returns for those years. The amount of spousal benefit included in your income, could be in the thousands of dollars. That may or may not be significant enough for you to file amended returns. Check with your tax advisor for help in determining the best options for you.

For those marrying in 2015 and later, check in with your company's HR or payroll department when changing your withholdings, beneficiaries, and possibly your name, that the correct method is being used for calculating your health insurance deductions for both you and your spouse.

The unlimited marital deduction is worth getting married for.

Legally married couples are exempt from almost all federal taxes that are charged on money or property transfers between them. This includes during your lifetime, or after death. Beginning in 2013, this applies to all legally married same sex couples, as well.

The current federal laws surrounding the gift and estate tax allow a lifetime exclusion of approximately $5 million (it is $5.43 million currently, adjusted annually for inflation). This means that every person can give in the form of gifts or bequests at death this amount of money, free of federal tax. If you give more than that during your lifetime, and/or leave more than that at your death, you will owe an estate and/or a gift tax.

As one of the same sex marriage tax benefits, this means that as a legally married couple, you can enjoy a lifetime of gifting to each other, without taxation. At the end of your lives, one spouse can inherit all of the deceased spouse's assets, without taxation. The surviving spouse can use any portion of the deceased spouse's exclusion which has not been previously used, under the portability provisions of the estate tax laws.

There are state estate tax laws to consider in all of this, as well. Upon marriage, you need to review all of your estate planning documents to see if everything is still appropriate, given the new laws.  Are there any previously filed gift tax returns that need to be amended because the gifts were actually to your spouse? Conversations need to take place with your tax advisor, estate planner, and attorney.

Social Security implications are huge.

Same sex marriage tax benefits include spousal and survivor benefits as a married couple. If you are nearing retirement age, then immediate planning opportunities exist. Younger couples can proactively include these benefits in their retirement planning.

Spousal benefits can be received as long as the couple has been married for at least one year. And survivor benefits can be received if the couple has been married for at least nine months. These same sex marriage tax benefits will amount to several hundred thousand dollars.

Watch for further guidance from the Social Security Administration about claiming benefits retroactively. Notify Social Security as to any name change prior to filing your income tax returns. Social Security will know of your marital status through the proper filing of your income tax returns.

Summing up.

Financial and tax planning is another major consideration in the marriage process. The same sex marriage tax benefits seem to be aplenty, but there are some negatives to consider. The so-called "marriage penalty" can actually cause a married couple to pay more in taxes jointly than they would have paid as unmarried or single. The extra income of a married couple can throw off Medicaid eligibility, or student loan and other debt repayments.

There are community property states, which can give unintended consequences regarding property division should divorce ever come into the picture. There are common law states that allow you to be legally married without even holding a ceremony.

Before marriage, consult with your tax advisor, your financial and estate planner, and your attorney. Discuss wills and intended outcomes. After marriage there are many documents at your place of employment to tend to, including income tax withholdings, health insurance coverage, and changing retirement plan beneficiary. Bring in the new tax strategies that meet with your new life.

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