What Legalized Same-Sex Marriage Means for Taxes

April 12, 2013

When you are part of a married couple, you generally file a joint tax return. You probably don’t think too much about how your legal tax-filing status affects the amount of your tax liability.

The advantage of a joint return is apparent when one person earns all or the majority of the income.  It is also a huge advantage when one spouse dies, and the estate is left to the second spouse tax-free.

But people who are part of a same-sex married couple, which is currently a legal option in 9 states and Washington, DC, are not permitted to file a joint return, and thus lose out on many of the legal tax benefits that are offered to opposite-sex couples.

This is the heart of the argument against the Defense of Marriage Act (DOMA) which is currently in the hands of the Supreme Court, after arguments were heard in late March.

Inheritance Taxes

In the case that was brouA smiling same-sex couple.ght before the Supreme Court on March 27, United States vs Windsor, an elderly woman, Edie Windsor, was with her female partner for 44 years, and the two women married in 2007 according to the laws of New York. When her partner died and left her a sizeable estate, Windsor was not permitted the usual situation of a spouse inheriting tax-free. Instead, Windsor paid over $350,000 in estate taxes because the IRS does not recognize their marriage as legally valid.

Regular Income Tax Filing

Most of the tax situations involving same-sex couples do not involve the inheritance of massive estates, but instead concern the simple and common situation of one spouse earning the majority of the income.

In the case of one spouse earning $100,000 and one spouse earning none, CNNMoney reports that a same-sex couple, filing separate returns, would pay approximately $8000 more in taxes than would an opposite-sex couple who files a joint return.

In this situation, the opposite-sex couple would incur a tax liability of $11,850 while the same-sex couple would pay over $19,500 – a huge discrepancy.

Other Tax Benefits

There are other situations where a same-sex couple is denied the tax benefits that are available to opposite-sex couples. Many companies offer health insurance benefits to their employees and their “domestic partners”, which could include married couples. According to current tax law, those employer-sponsored benefits are taxable to the employee’s partner. This can add thousands of dollars to the couple’s tax burden that an opposite-sex couple does not have to pay.

Another area where same-sex couples lose out is in Social Security benefits. Same-sex spouses are not recognized under the current Social Security program, so they do not qualify for spousal or survivor benefits. If one partner assumes the full financial burden of the family, and one is a stay-at-home parent (a common enough scenario even these days), the non-working partner may be left in a desperate situation should the working partner die.

The transfer of property for joint-ownership purposes is also problematic for same-sex couples. The IRS permits only $13,000 worth of transfer per year before gift taxes are triggered. If a same-sex couple is attempting to title their separate properties in both partners’ names, the value of the property transfer that exceeds $13,000 per year can be hit with a 35% tax rate.

And one more plus if in fact the DOMA is overturned by the Supreme Court; the tax situation may be retroactive, meaning that same-sex couples who have been married for three or more years would be able to amend their previous tax returns for the past three years and reclaim any taxes paid as the result of filing separately.

Conclusion

Same-sex marriage is currently legal in 9 states plus Washington, DC; thirteen other states have some sort of recognition laws. The issue is under heated discussion in most of the remaining states. The country seems to be on the path to fully accepting and legalizing same-sex marriage, which is wonderful news for all of the same-sex couples who just want to be recognized as fully equal citizens in the eyes of the law.

Should you have any questions about your own taxes and filing status, be sure to consult with a Los Angeles tax preparation company about your personal situation.