MarketWatch article by Jonnelle Marte
In addition to having implications for Social Security benefits, child care rights and retirement planning, the high court’s ruling that the Defense of Marriage Act is unconstitutional might mean a check from Uncle Sam. Couples may be able to amend prior years’ tax returns to receive bigger refunds now that their marriages are recognized by the federal government.
Income tax filing has been frustrating for many couples, some of whom had to file as many as four separate returns because of the conflicting state and federal rules. And since they were unable to file joint returns, same-sex couples lost out on some of the deductions and credits allowed for heterosexual couples, such as breaks offered to those selling a home and child-related tax credits.
To be sure, the decision leaves some question marks. The court cases did not address how the government should treat civil unions between same-sex couples, says Alison Flores, an attorney and analyst with the Tax Institute at H&R Block. Also, the ruling does not mean states that currently prohibit same-sex marriage now have to permit it.
But experts say couples may want to meet with their accountant to run through some of the case’s financial implications. Here is a look at some key topics to consider.
Gift taxes and estate planning
This issue, which was at the heart of one of the cases, should now be greatly simplified for many same-sex couples. Without federal recognition, many couples were not able to pass assets to their spouses after death, as straight couples could. Instead, spouses inheriting more than $5.1 million in 2012 (raised to $5.25 million this year) were subject to the estate tax. One of those spouses was Edith Windsor, a widow who challenged the aspect of the Defense of Marriage Act that defined marriage as being between a man and a woman after she was hit with a $363,000 federal estate tax bill when her wife died in 2009. (The aspect of the law that says states don’t need to recognize same-sex marriages from other states, did not come before the court.)
Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may find that a trust isn’t necessary now that assets can be passed directly to their spouse tax-free. Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option that has only been available to straight couples, says Scott Squillace, an estate planning lawyer based in Boston who focuses on gay couples.
The ruling could also make it possible for married same-sex couples to share assets without being subject to gift taxes. This would sometimes be an issue for couples that owned a house together, but didn’t equally split mortgage payments and other expenses, says Squillace. While rarely enforced until one spouse died or was audited, those expenses covered by one spouse could technically be subject to gift taxes if they exceeded $14,000 annually, says Squillace. But now that those marriages are recognized by the federal government, some same-sex couples may feel more comfortable adding their spouses name to the property title, knowing that they’ll have more flexibility on how they choose to split those expenses.
Income taxes
Not being able to file jointly has also meant that many same-sex couples faced larger tax bills than straight couples, says Kenneth Weissenberg, a partner at accounting firm EisnerAmper, who estimates he and his husband Brian Sheerin paid an additional $5,000 in taxes last year because they couldn’t file as a married couple. Many married couples owe less in taxes when they file their returns jointly than they would as individuals, especially when one spouse earns more than the other, says Weissenberg. Married couples filing jointly can take advantage of certain credits and deductions that can lower their overall tax bill, since they can share capital gains and losses, receive a larger exclusion if they sell a home (of up to $500,000 for married couples, compared with $250,000 for an individual), and receive child-related tax credits, among other tax breaks.
Many gay couples have had to prepare a joint federal return—which they couldn’t file—in order to have all the information needed to be able to file jointly at the state level. They can now turn to those dummy returns, or prepare a sample return now, to know if they would have saved on taxes by being able to file jointly, says Flores of H&R Block. Then they may be able to collect refunds on any taxes they overpaid in previous years by filing amended returns as a married couple.
That relief may be limited, however. Couples who married in one state that allows gay marriage but move to a state that doesn’t could find themselves in a situation where their union is recognized by the federal government but not by the state they reside in. Under that scenario, they may be able to file married jointly for their federal tax returns but need to file separate state tax returns. Generally, the IRS allows taxpayers to amend returns for up to three years after the filing deadline or up to two years after the taxes are paid. The timeline may be different at the state level, and some couples may have more time if they filed protective claims for previous tax years that would give them an extension for amending returns.
But not all couples should rush to file amended returns. Some couples, especially high-earning couples where both spouses are working, could get hit by the so-called marriage penalty. In some cases, spouses are better off filing separately if it increases their chances of qualifying for certain income-based deductions like the medical tax deductions.
Health benefits
For some same-sex couples, the biggest tax hit came from an area most married couples don’t yet associate with tax season: their health benefits. While more employers are allowing same-sex spouses to be added to their employees’ health plans, it was provided as a taxable benefit—costing those couples an additional $1,069 a year in taxes, according to a 2007 report by the Center for American Progress, a progressive think tank. But now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable.
And even if they aren’t changing plans, some couples may be able to file an amended return to collect the taxes they may have paid on those benefits in previous years.
Of course, some couples may be better off financially by continuing to get coverage through their separate employers. As MarketWatch previously reported, more companies are denying health coverage to spouses who can get coverage through their own jobs. And if they do allow spouses, many are making that coverage more expensive by introducing higher surcharges, lowering reimbursement rates, or making the worker pay the full cost of the premium.
Source: marketwatch.com
Posted by Steven Maimes, The Trust Advisor
Permalink: http://thetrustadvisor.com/news/same-sex-couples
