New Tax Benefits for Same-Sex Couples
The Treasury Department and the Internal Revenue Service announced last week that they will apply the federal “married” tax treatment for same-sex married couples no matter where they live — even in the 37 states that don’t recognize their own citizens’ gay marriages. The guidance is part of the government’s implementation of the June 26 Supreme Court decision that struck down a key part of the Defense of Marriage Act.
If you are a married gay or lesbian couple, what are some of the implications of these changes for you?
First, estate planning. You can now transfer as much money as you like to your spouse free of any federal estate and gift taxes. This means that you no longer have to utilize expensive and restrictive tools such as grantor-retained income trusts (GRITs) to minimize gift taxes when transferring assets. If you’ve carried extra life insurance to offset potential federal estate transfer taxes after death, you’ll now be able to implement bypass trusts instead.
Regarding income taxes, many of the disadvantages that domestic partners have faced go away once they marry. For example, as a domestic partner, you are responsible for paying taxes on any health insurance provided for your partner by your employer. This does not apply to a married couple. There are also tax credits (such as the Child Tax Credit) that are limited to married couples only. However, the most obvious benefit, the ability to file as married filing jointly (MFJ), may actually be a negative. If both you and your spouse have high incomes, filing a joint return will likely increase the total income taxes you pay, as compared with what you paid when you filed as two individuals (the so-called marriage penalty).
Same-sex couples that have been legally married since 2010 and want to retroactively switch to MFJ can submit claims for refunds for taxes paid as single individuals for tax years 2010, 2011 and 2012. The statute of limitations for filing refund claims is three years from when the return was filed or two years from when the taxes were paid, whichever is later. The Treasury Department and IRS will also provide further guidance to companies on how qualified retirement plans ought to retroactively treat same-sex spouses.
Keep in mind that the new rules only apply to married couples, not to domestic partnerships. Also keep in mind that we don’t yet know how this guidance will affect Social Security. The ability for you to collect 50% of your spouse’s social security payments (and 100% after he/she dies) remains one of the most valuable federal marriage benefits. If applied to same-sex married couples, it could be a real boon for them.