On May 20, Pennsylvania became the 19th state to allow same-sex marriage. In the nine months that followed, 18 more states have followed suit. Now, with only 13 non-marriage equality states remaining and the Supreme Court poised to rule on marriage equality this summer, it seems imminent that we will have national marriage equality in 2015. Because of these changes, many LGBTQ committed couples are facing the decision of whether to wed.
Love and commitment are probably the most important things to consider when contemplating nuptials. However, practical issues, which are not nearly as fun to discuss, should be considered. Marriage can have a significant economic impact on LGBTQ families, especially for more financially mature couples. Failing to address or quantify the effects can cause serious unwelcomed financial surprise, even worse than your wedding caterer coming in over budget.
This article covers common tax and financial-planning issues LGBTQ couples should consider before tying the knot; however, it is not all-inclusive and should not be used to replace professional advice. The decision to marry can affect your family in many quantifiable ways, which should be discussed with your tax, financial and legal advisor before you walk down the aisle.
Income-based benefit programs
Several benefit programs are administered by federal and state governments that have income-based eligibility standards. These standards are often different for single versus married individuals. Many couples will find it difficult to qualify for Supplemental Security Income or Medicaid if they are married and living together. If you, your partner or your children are planning on pursuing higher education, need-based education assistance is based on the economic resources of both spouses. Marriage may not be ideal for couples where one spouse or one spouse’s children are eligible for income-based benefit programs or education assistance, since meeting eligibility standards may be more difficult.
Employer benefits
For an unmarried couple, the estimated value of an employer’s financial contribution towards health-insurance coverage for an employee’s non-dependent partner must be reported as taxable wages earned. This is often referred to as “imputed income.” However, for married couples, a non-employee spouse’s health-insurance coverage is tax-free. Thus, couples should alert employers of their marriage immediately to ensure proper treatment.
Effective March 27, 2015, the Department of Labor will broaden its definition of spouse to recognize same-sex marriage for the Family Medical Leave Act (FMLA). Private employers with 50 or more employees must comply with FMLA laws. Prior to the effective date, this important job-protection benefit was not available to same-sex married couples who lived in non-marriage-equality states.
Titling of assets
Married couples should consider how their assets are titled, even if those assets were owned jointly prior to marriage. This decision can have a significant effect on a creditor’s ability to reach certain assets. Both real and personal property held by married couples as “tenants by the entireties” in Pennsylvania are generally exempt from creditor claims of only one spouse. This protection is lost if the spouses divorce or the debtor spouse survives the other and becomes the sole owner of the property. Additionally, tenancy by the entireties protection does not apply where both spouses are jointly indebted to the creditor.
Retirement benefits
Many Social Security Administration (SSA) benefit plans are tied to marital status. In June, the SSA published new instructions allowing the agency to process more claims for same-sex couples, including those claims related to non-marital legal relationships (such as domestic partnerships or civil unions), if recognized by the state in which the applicant is domiciled, because SSA recognizes marriages and non-marital legal relationships based on the place of domicile. If you are married, live in a non-marriage-equality state and believe you qualify for spousal benefits, you should apply for benefits. If your claim is denied, and national marriage equality occurs, your benefits may be retroactive to your original application date.
Qualified retirement-plan rules generally require that a surviving spouse be entitled to the benefits under the plan unless they consented to a different designation during the plan participant’s lifetime. Absent such consent, the surviving spouse will be entitled to either a pre-retirement survivor annuity or joint and survivor annuity benefit. Updating your beneficiary designations after marriage is important if you desire to leave qualified retirement-plan assets to anyone other than your spouse.
Income taxes
The Internal Revenue Service (IRS) stated in an August 2013 Revenue Ruling they would adopt the state-of-celebration rule, recognizing same-sex marriages validly entered into in a state whose laws authorize same-sex marriage, no matter where that couple is domiciled. They further stated that registered domestic partnerships, civil unions or other similar formal relationships “not denominated as a marriage” under state law would not qualify a couple as married for federal tax purposes.
The Congressional Budget Office reported same-sex marriage tax filings would likely be revenue-neutral, suggesting an even split of revenue generated from couples facing the “marriage penalty” versus those benefiting from a “marriage bonus” — the former being when a couple pays more income tax as a married couple than they would have as two single individuals; the latter, when they would pay less. There are many income-tax limitations, thresholds and maximum deductibility limits that change when individuals marry. Preparing a tax projection to evaluate the tax impact of nuptials will quantify the impact of marriage on your taxes.
If you were married prior to 2013, you may be due a tax refund for 2012 or 2011. Check with your tax advisor to see if you might benefit from filing amended returns. A 2011 amended return may need to be filed by April 15, 2015, so time is of the essence.
There are two scenarios in which finalizing an adoption during the calendar year before marriage could cause the adoption tax credit to yield potentially significant tax savings. Couples considering second-parent adoption need to be aware that the adoption credit is not available for the adoption of a spouse’s child. Higher-earning couples, or couples with disparate income, may allow for more flexibility if they remain unmarried due to income limitations for couples with combined income over $195,000. By finalizing an adoption in the calendar year before getting married, a couple has the potential to save enough tax dollars to finance a honeymoon and a babysitter!
Estate, inheritance and realty-transfer tax
Generally, there is an overwhelming estate, inheritance and realty-transfer tax benefit for partners who marry. If you live in Pennsylvania, you will see a decrease of 15 percent in your state-inheritance tax rate upon marriage, no matter the size of your estate. This is especially impactful on the testamentary transfer of personal residence ownership. Newlyweds should be quick to contact their CPA or estate-planning attorney to review their estate plan, especially since prior documents were most likely drafted to work around the inability to wed.
Getting sound tax, financial and legal advice to think through the economic impact of marriage is essential. However, it has been said, that love endures through every circumstance, and I think that even includes higher tax bills.
Rosalind W. Sutch, CPA, MT, is a shareholder at Drucker & Scaccetti (D&S), a Philadelphia-based tax advisory firm. Roz leads D&S’s LGBT Tax Consulting & Financial Planning Practice Group and can be reached at [email protected].