Couples still need to watch for potential land mines.
by Grace S. Yung
This past June 26, a cheer went up throughout the LGBT community when the Supreme Court ruled that Section 3 of DOMA (the Defense of Marriage Act) does in fact violate the “equal protection under the law” provision that is guaranteed by the Fourteenth Amendment of the Constitution. This essentially means that there is no legitimate—or legal—reason for the federal government to discriminate against same-sex married couples.
Since its passage back in 1996, DOMA has defined marriage as being a legal union between only a man and a woman—which, in essence, denied same-sex couples from obtaining federal benefits such as Social Security income based on their partner’s work record and estate tax exemptions.
So while this ruling is great news, there are still many gaps and uncertainties regarding how same-sex couples may and may not take advantage of the rights and benefits that are afforded to their heterosexual counterparts. Because of this, it is important to understand where these land mines may be, and how to successfully plan around them.
The State of Your Marriage
While the recent DOMA ruling means that every couple that is considered to be legally married by a state’s laws must be granted the same federal rights and benefits, these rights are limited to couples that reside in states where same-sex marriage is legal.
With this in mind, there are questions that must be resolved. For example, if a same-sex couple that is legally married in one state—or even in a foreign country—chooses to reside in a state that does not recognize that marriage as legal, will they be entitled to federal benefits? At this time, it appears that the answer is no.
In other words, those states that do not recognize same-sex marriages that were performed in other states are allowed to refuse federal benefits such as Social Security to a partner. At the time of the late-June ruling, there were still thirty-five states that do not allow same-sex marriage.
Similarly, any couple that has not been married at all—as well as those who have entered only into a civil union—will not be allowed to take advantage of the new ruling, regardless of whether or not their state condones same-sex marriages.
What about Taxes?
One of the biggest benefits to the overturning of DOMA is in the area of estate taxation. As of 2013, the estate and gift tax exemption is $5.25 million per individual. Therefore, legally married couples can qualify for in excess of $10 million of estate tax exemption. As an added benefit, the surviving spouse can also use the unused portion of his or her partner’s exemption to help in sheltering assets in their own estate.
While this is great news, wading through the planning of trusts and asset titling can be tricky. In this case, it is important to not only work with a professional in this area, but with one who understands the issues of same-sex couples.
The DOMA ruling also means that many couples will now be able to file joint income tax returns. What some may be unaware of, though, is that for some same-sex couples, taxes may actually be higher when filing jointly. This can be the case for both lower and higher income-earning couples, and for those couples who have children.
For example, if a married same-gender couple with children each earns $75,000 per year, it is likely that they will owe approximately $4,000 more in tax compared to what they would have owed by filing individual income tax returns. Given this, in certain cases it may make more financial sense to file income tax returns as individuals.
Another area where same-sex couples can come out ahead is in the area of government benefits such as Social Security and Medicare. Here, if one partner works and the other does not (or earns a smaller income), the non-earning spouse may be entitled to one-half of the earning partner’s benefit.
Those who are non-earning spouses can also obtain Medicare benefits based upon his or her partner’s work history. There is, however, a potential “marriage penalty” for high-earning couples that may be required to pay additional Medicare taxes, as well as a net investment income tax of 3.8 percent. This means that there may be a surtax of 3.8 percent due on net investment earnings if a person’s modified adjusted gross income exceeds $200,000 per year if single, or $250,000 if married and filing taxes jointly.
The Timing of Benefits
At this time, it is also uncertain as to when the newly entitled beneficiaries of federal benefits will be able to take advantage of them. For example, even though a legally married same-sex spouse may now have access to Social Security spousal benefits, it is unlikely that Social Security—or any other federal agency—will be ready to process these applications right away.
Likewise, the Internal Revenue Service will also need time to prepare itself for what will likely be a substantial number of amended tax returns, as legally married same-sex couples will be able to file amended returns for the past three years in order to receive the benefits that were denied to them by DOMA. And, while the IRS has stated that it will issue guidelines for couples that are now entitled to file jointly, this too may take some time.
How to Ensure that You Are Prepared
With all of the changes to the tax and financial landscape—and the potential land mines that could occur—it is essential to keep in mind that every situation calls for a plan that fits in with a couple’s or individual’s specific situation. Because of this, it is best that all planning be conducted using a qualified professional in the area of tax and finance as it pertains to the LGBT community.
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.
See other MoneySmart columns:
Saying Goodbye to DOMA (August 2013 OutSmart)
What it really means.
Critical Illness Insurance (July 2013 OutSmart)
Filling in the gaps.
Implementation of Obamacare (June 2013 OutSmart)
How LGBTs can prepare.
The Aging Population (May 2013 OutSmart)
How LGBTs folks can prepare for living longer.
Staying on Top of the Fiscal Cliff (April 2013 OutSmart)
How to maximize your investments, even if your paycheck is smaller
Finding the Funds …to make your IRA contribution (March 2013 OutSmart)
Have You Made Your 2012 IRA Contribution Yet? (February 2013 OutSmart)
There is still time!
What’s Different for 2013? (January 2013 OutSmart)
Considerations for Texas and your future investments.
LGBT Partners… (December 2012 OutSmart)
Working around the denial of your government benefits
Future Tax Rules Can Further Penalize LGBT Investors (November 2012 OutSmart)
But there is still time to act
Protecting your Wallet and your Heart (October 2012 OutSmart)
How and when to keep assets separate—even when you’re madly in love
Domestic Partner Tax Deductions in Home Ownership (September 2012 OutSmart)
With today’s historically low interest rates, it’s certainly a great time to either purchase or refinance a home.
Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?
Protecting the Things that Matter (July 2012 OutSmart)
How those in the LGBT community can use life insurance planning strategies
When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart)
Ensuring both partners’ fair share with a Domestic Partnership Agreement
Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution
Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?
The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price
Gay Money Matters (part 1) (February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning
Gay Money Matters (part 2) (February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t