Last month, the Supreme Court struck down state bans on same-sex marriage, conferring the same marriage rights to same-sex couples that heterosexual couples receive in all 50 states and the District of Columbia. Now, same-sex couples have the equal right to experience the ups and downs of marriage, which includes figuring out taxes, IRAs and estate planning.
Before the court’s decision, same-sex couples faced a confusing patchwork of state and federal laws around taxes and money. For instance, if their marriage was recognized in their home state, they could file a state tax return as married but had to file federal tax returns separately. If they moved to a state that didn’t recognize their marriage, then they might have to take extra measures to ensure their home was properly titled and sign power of attorney documents so one spouse could make financial decisions for the other if needed.
Here’s a look at some ways same-sex couples’ finances could be impacted by the recent ruling.
Social Security. Until recently, same-sex couples did not qualify for spousal benefits from Social Security if their marriage wasn’t legally recognized. “Now that they’re considered legally married, they’ll have more options when they go to apply for Social Security benefits,” says Holly Hanson, principal and founder of Harmony Financial Strategies, a Los Angeles-based firm that works with LGBT and nontraditional families. “They could have access to their spouse’s benefits, which could be higher.”
For any surviving spouse trying to collect survivor benefits, the claimant must have been married to the deceased for at least nine months. Hanson says it still remains to be seen if the Social Security Administration will include marriages before the June 26 Supreme Court decision when determining eligibility. “Someone could have been married for five, 10 years before that,” she points out, encouraging those who might be eligible to still apply.
Retirement planning. Before the ruling, a working same-sex spouse in a state that didn’t recognize the marriage couldn’t contribute to a spousal IRA for a non-working spouse, explains Jessa Fannin, a chartered retirement planning counselor with Libertas Wealth Management Group in Ohio (one of the 13 states that previously did not recognize same-sex marriage). Now they can contribute up to $5,500 per year (or $6,500 for those over 50) to a spousal IRA. And for legally married couples, an IRA would automatically pass onto the spouse when the account holder died. For couples whose marriage wasn’t legally recognized, the surviving spouse would only inherit the IRA if he or she had been designated as the beneficiary.
Pension benefits were another pain point for same-sex couples whose marriage wasn’t recognized. For legally married couples “you may have a lump sum payout option and an option for annuity,” Hanson says. “Annuities typically go according to your life only. If their spouse wasn’t recognized, that option wasn’t available.”
Estate planning. Historically, many same-sex couples ignored estate planning or spent thousands of dollars on estate lawyers to ensure a partner received assets upon the other partner’s death. “Now, the legally married spouse is able to administer the estate,” Hanson says. “Before you could have relatives come in and contest the will.” Legally recognized marriages also will help same-sex marriage couples avoid estate tax or gift tax when transferring or bequeathing assets to a spouse.
Taxes. Filing a state tax return as married and a separate federal tax return as an individual was cumbersome for many couples and could cost more in tax preparation fees. However, for some, filing joint taxes now may in fact cost more than filing separately thanks to the so-called marriage penalty. “If you have two people who are working and not necessarily making the same income, now it’s possible that they’re going to wind up paying a little more tax,” says Michael Eisenberg, a certified public accountant and personal financial specialist with Innovative Wealth Advisors in Encino, California. That said, if one spouse has capital gains, the couple might be able to offset that using the other spouse’s losses, a strategy that wasn’t available to same-sex couples before.
Also before the ruling, same-sex couples whose marriage wasn’t legally recognized could owe taxes on employer-provided health insurance benefits for the non-spouse. Some employers grossed up pay checks to cover the extra taxes, but now same-sex couples can avoid taxes on this so-called “phantom income” altogether. According to Eisenberg, it remains to be seen if the states that didn’t recognize same-sex marriage will allow couples to file amended state tax returns as married and get a refund. Amended returns aren’t free, so couples should weigh that cost against the size of the refund.
Divorce. Now that same-sex marriage is legally recognized in every state, couples who decide to split up will be able to legally divorce. Before the ruling, most states treated them as “unequals with no legal rights that married couples would have in terms of division of property,” says New York-based divorce attorney Bruce Provda. “They were treated as strangers to each other.”
Now that divorce is a legal option, same-sex couples should consider signing a prenuptial, because while marriage may be a hard-fought right, divorce can be financially ugly. “There’ll be a new avenue of matrimonial discourse open for a lot of attorneys,” Provda says.
While there are still some wrinkles to be ironed out, Fannin predicts that the ruling will help gay and lesbian couples streamline their finances. For those that lived in states that didn’t recognize their marriage, she says, “they would have to go to great lengths and expense to handle some of these situations.”
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The Money Impact of the Supreme Court’s Gay Marriage Ruling originally appeared on usnews.com
