Gay and getting married? Financial advantages (and disadvantages)

WASHINGTON — The U.S. Supreme Court ruled same-sex couples nationwide could legally wed in June 2015, and gay couples have been flocking to churches and courthouses ever since.

A 2017 Gallup poll found 10.2 percent of gay couples in the U.S. are now legally married.

Financial implications are likely not at the top of the list for gay couples deciding to declare their devotion in matrimony, but there are several to consider.

Some may not be beneficial. Some are. And the biggest issues for married gay couples, just as with married straight couples, should be retirement planning, estate planning and tax planning, experts say.

At the top of the beneficial list for gay couples marrying?

“The survivor’s Social Security benefits is the big one,” said Bill Moran at Merrill Lynch’s D.C. office. “If you’re fortunate enough to have a retirement plan where there is a pension benefit, then that can be transferred from spouse to spouse.”

“And the other big issue is gifting. Spouses are able to leave an unlimited amount of money between spouses, and if you’re not married, that doesn’t happen,” he said.

Beware the ‘marriage penalty tax’

Incomes also matter.

A big difference in what each partner makes can muck up the works, especially with the IRS.

“The big one that people come back to is the marriage penalty tax,” Moran said. “It is something you need to sit down with your financial adviser and figure out if you’re better off being married or not being married.”

He added: “You could be subject to not getting some of the tax exclusions that would have worked to your advantage if you were not married. In particular if there is a big variance of income between both individuals.”

Moran encourages gay couples to discuss the marriage penalty tax with a tax adviser to have a clear understanding of the implications, but he said that shouldn’t be the sole reason against getting married.

Considerations include loss-limit deductions on things such as investment property, IRA and retirement account deductions, and other tax planning situations that can become significant considerations when one partner earns much more than the other.

“Access to Social Security benefits is good, but overall tax implications can be a surprise,” said Alexandria resident Jacob Flinck, who married his longtime partner in 2016. “Double income, no children — ouch.”

When combining the income of the two spouses, it may put them both into a higher tax bracket, thus producing additional tax liabilities.

Also consider homeownership, retirement

For unmarried gay couples with a big variance in incomes, homeownership could also be a potential pitfall

“A non-married couple that owns their house with joint tenants with right survivorship, the surviving individual will receive that house when the first one passes away, but there could be some gift consequences, depending on how the money went into paying for the house and who put more money into it versus who did not,” Moran said.

There are also retirement accounts to consider.

Married couples can pass IRAs or 401(k)s to one another at death without triggering taxes.

If you die with money in your retirement accounts, the IRS begins taxing that money as soon as your beneficiaries withdraw the money and forces a withdrawal within a set amount of time, but an exception exists for distributions to spouses allowing the money to keep growing with deferred tax.

Health decisions: ‘Families can … be a mine field’

Another consideration is health care.

More and more companies offer health care coverage to their employees’ domestic partners. Depending on company policy for family coverage, legal marriage guarantees it.

There is also a financial benefit for surviving spouses in a health saving account, since that money can be transferred to the surviving spouse.

Likewise, a married couple in a joint health savings account can contribute more pretax dollars.

Married couples, straight or gay, also legally speak for each other in terms of medical decisions made. Unmarried couples, either straight or gay, do not automatically have that legal representation.

For gay couples who choose not to marry, that is easily addressed through a medical power of attorney, or advanced medical directive or health care proxy, a legally binding document that should not only be drafted and certified, but readily available in the event of an emergency.

“Some states, such as Virginia, maintain an online database, which provides health care providers a place to turn to look up a patient’s documents,” said Raymond Quianzon, a tax attorney in the District.

“Families can often be a mine field to navigate during a situation where patients cannot speak for themselves, and one can avoid a battle between parents, siblings and life partners by spelling out one’s intentions ahead of time with a simple legal document,” Quianzon said.

Power of attorney can cover both health care and financial decisions, should one unmarried partner become incapacitated.

The bottom line is that one size most definitely does not fit all gay couples when it comes to the financial implications of marriage.

The best advice for gay couples planning to wed is simply to get advice.

Sitting down with a financial planner and a tax attorney is not a big expense, and knowing what to expect before saying “I do” can avoid a number of unexpected surprises.

Jeff Clabaugh

Jeff Clabaugh has spent 20 years covering the Washington region's economy and financial markets for WTOP as part of a partnership with the Washington Business Journal, and officially joined the WTOP newsroom staff in January 2016.

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