The LGBT community is anxiously awaiting the Supreme Court decision, expected imminently, that may finally establish same-sex marriage as a civil right in all 50 states. But regardless of how the court decides, married same-sex couples still have to be vigilant and proactive in how they protect their financial assets and plan for the future.
Following are tips about some of the most important areas to consider:
1. Married Tax Status: Determine if there is any benefit to amending previously filed income-tax returns using your “married” status. Married tax status as compared to single or head of household status could result in a lower joint-tax liability because of the netting of income and deductions, eligibility for certain tax credits and income exclusions. It could also result in an increased tax liability due to the marriage-penalty tax or because of limitations on deductions based on combined adjusted gross income. File amended returns as soon as possible; don’t wait until April 15. Amended returns must be filed before the statute of limitations runs out — generally three years from the filing of the original return or two years from when the tax was paid, whichever is later.
2. Non-Taxable Fringe Benefits: Consider amending income-tax returns to exclude previous taxable income that was used to purchase job-related benefits for your spouse, such as health insurance, life insurance and other benefits. Employers may be entitled to a refund of matching FICA payments on benefits that are now non-taxable. The statute of limitations for refund claims also applies. In spite of the federal court rulings, many employers have not properly adjusted their benefit and payroll systems to account for this change. Individuals should carefully review their W-2 forms to confirm that no taxable income is improperly being added for spousal benefits. Also make sure you have advised your human-resources department of your marital status and provided them with a copy of your marriage certificate.
3. Employer Spousal Benefits: Save current tax dollars by contacting your company’s human-resources department for a list of marital benefits available. Take advantage of all non-taxable benefits available to your spouse. Also, look for a benefit that may pay you a buy-back amount if you no longer need employer-paid benefits (because you are now covered under your spouse’s plan). Like non-taxable fringe benefits above, some employers have not properly updated their systems, so a call or visit to HR may be warranted.
4. Retirement Accounts: To save taxes your beneficiaries will pay after your death and allow the payout to be stretched out as long as possible, check your IRA/401K plan designations. A same-sex spouse may not inherit or roll over such a plan to his/her own name in states that do not recognize same-sex marriages. Also, consider making a year-end retirement account contribution for your spouse (if applicable) and receive an additional deduction. Make sure your beneficiary designations are updated for marriage (and divorce!) as well as contingent beneficiary designations for children or others.
5. Social Security: Apply for Social Security marital benefits and the lump-sum death benefit, if applicable. Currently, the Social Security Administration is only processing claims for same-sex married couples who reside in states that recognize their marriages. Even if you live in a state that does not recognize your marriage, you should apply anyway — applying will preserve your filing date, which is used to determine the start of benefits. If you reside in Pennsylvania or another state that recognizes same-sex marriage, apply for benefits before you move to a state that does not; your benefits will travel with you.
6. Estate Taxes: If your same-sex spouse died and the estate paid estate taxes on the portion of the estate that you inherited, file a claim for refund. If you and your spouse did not do any estate planning prior to death, be sure to consult with an attorney or an accountant in a timely manner, as there are estate-planning techniques and elections available for married couples after death. Even if you are not required to file a federal estate tax return, consider filing one to take advantage of portability. Portability allows your deceased spouse’s unused federal-exemption amount to be rolled over to you as the surviving spouse.
7. Making Gifts: Consider transferring assets, gift-tax free, to your spouse. When making gifts to loved ones and children, consider the benefits of year-end gift-splitting. One spouse may now utilize the other spouse’s annual gift-tax exclusion amount by electing to split gifts. In 2015, the annual gift tax exclusion is $14,000.
8. Estate Planning: If you reside in a state that has a death tax and recognizes same-sex marriages, establish a marital trust, Qualified Terminable Interest Property Trust (QTIP) or disclaimer trust for your spouse in your will. If you reside in a jurisdiction that does not recognize same-sex marriages, you must plan as if you are single and execute a will, as state laws control inheritance rights. Your spouse will not automatically inherit or be entitled to any of your estate if you die without a will. Also, if you made substantial gifts to children, trusts or others over the past few years, additional gifts may now be feasible. The gift- and estate-tax exclusion amount increases each year and is now $5.43 million per individual ($10.86 million for legally married couples). Additional gifts may be possible to bring your total gifts to the new limit if you anticipate having a taxable estate (check for inflation-adjusted increases annually).
9. Payroll Tax Withholding: Update your Form W-4 with your employer to change your status to married and increase or decrease your exemptions. Make a note and place it with your other tax-preparation documents so your tax preparer can advise you again in April if another revision is recommended.
10. Other Points: Same-sex couples in a domestic partnership or civil union might want to consider getting married, as different laws apply. Same-sex married couples who divorce may now be able to take a deduction for alimony payments.
11. Innocent Spouse Protection: As the number of same-sex legally married couples increases exponentially, so does the incidence of spousal tax fraud. The filing of a joint income-tax return can have a downside if a spouse substantially under-reports income or over-states expenses and/or losses on a tax return. Individuals who suspect their spouse may be engaging in tax fraud should consult a knowledgeable CPA or tax attorney to determine if a joint return should be avoided. If the IRS has already come knocking on such an issue, you need to consult an advisor to determine if the “innocent spouse rules” under IRS guidelines might be applicable. If you don’t understand what’s on your joint tax return, ask before you sign it!
David H. Glusman is advisory-services partner at Marcum LLP. Contact him at [email protected]
The above tax tips are provided by the LGBT & Non-Traditional Families Practice group of Marcum LLP, a top national accounting and advisory firm with an office in Philadelphia. As the first national accounting firm to establish a practice dedicated to the unique tax and estate-planning needs of same-sex clients, Marcum is widely regarded as a thought leader in this specialty area. For more information, visit www.marcumllp.com/LGBT.