DOMA Goes Down: What Does it Mean for Same-Sex Finances?

Last week, the Supreme Court ruled that the portion of the Defense of Marriage Act (DOMA) that denies federal recognition to same-sex couples is unconstitutional.

Due to the ruling, there are a few things that same-sex couples need to consider as they plan their finances in a post-DOMA world.

First: What the Ruling Doesn’t Do

It’s important to note that the ruling doesn’t force all states to recognize same-sex marriages.  In fact, some rather thorny issues are being raised by the ruling, which essentially says the federal government has to recognize as marriage what a state sees as marriage.  So far, only 13 states plus the District of Columbia recognize same-sex unions.  Here’s a list of the states that currently allow same-sex marriage.

If you live in a state where same-sex marriage is recognized, and you are legally married there, there is no problem.

Things get a little dicey if you are married in a state that recognizes same-sex unions and you live in a state that doesn’t recognize such marriages.  If you are married in New York, where same-sex marriage is legal, but move to Utah, where your marriage isn’t recognized, what happens?

That’s something that hasn’t been worked out yet.

Some say that the IRS can decide to go ahead and let you file jointly, and there are some federal benefits that would still be available (including survivor benefits) even if you move to a state that doesn’t recognize same-sex unions.  However, practice has been that the IRS considers your filing status according to state law.  But this issue might mean that the practice is abandoned, since there is no statutory direction for that practice.  But the federal benefits situation might be more difficult to sort out.

Efforts to repeal DOMA wholesale have been introduced in the House and in the Senate, so this issue might be revisited later.

Also, even though you might be able to file your taxes jointly and receive federal benefits as a same-sex couple now, if you live in a state that doesn’t recognize your union, you will still have to file state taxes separately, and you might not be eligible for state benefits.

Overpaid Taxes Due to DOMA: Get a Refund

Have you overpaid on your tax return due to DOMA?

If you have had to file separately, even though you are legally married in your state, you might have overpaid your taxes.  You can file an amended return for tax years three years past.  So, if you were legally married in 2010, 2011, or 2012, but you had file separately, and you have overpaid on your taxes as a result, you can amend your return to change your filing status to joint, and then re-figure your taxes, and possible get a refund for the amount you overpaid.

Estate Planning and the End of DOMA

Now that a portion of DOMA has been ruled unconstitutional, you can adjust your estate planning efforts to take advantage of some benefits that come with estate planning.

Some of the things to consider regarding estate planning now include:

• If your spouse dies, the unused portion of the estate tax exclusion can be transferred to your own, boosting the amount of the exclusion.  However, the proper paperwork will need to be filed in a timely manner to see the advantage.
• You are allowed to give a gift of $14,000 to an individual a year without paying gift tax.  Married couples are able to give $28,000; this can be from one person’s account or a joint account, or each couple can give $14,000.  This is up to the lifetime exclusion of $10.5 million for a couple ($5.25 million as a single).
• Same-sex couples also have access to rollover rights with a spouse’s IRA.  Special rules apply to IRAs that go to spouses after a death; other non-spouse inheritors are hedged about by certain requirements.

High Net Worth Gay Couples: Marriage Penalty

Many of us think of filing jointly as a plus, since it can be helpful in terms of reducing overall tax burden to your household.

However, once you reach a certain level of financial success, marriage becomes a penalty.  This is seen by the fact that tax brackets for married couples aren’t set at rates that are double for single filers.  For instance, a single filer with taxable income of $183,251 is in the 33% marginal bracket.  A married couple is in that bracket at $223,051.

This year’s new taxes as a result of the PPACA could cause problems for high net worth married couples, and same-sex couples are included in that.  There is an additional Medicare tax of 0.9% for those who have earned income above $250,000 ($200,000 for single filers).  Additionally, there is also a 3.8% tax on investment income for those in that income category.

Say you make $180,000 and your same-sex partner makes $150,000.  Additionally, you have investment income of $10,000 and $20,000, respectively.  If you remain single, you won’t be subject to Medicare taxes because each of you falls under the income requirements for single filers.  If you marry, though, you are over.  You will have to pay 0.9% on the $80,000 that is excess of the $250,000 threshold.  Plus, you will have to pay 3.8% on the $30,000 of investment income you have.

Finally

There are plenty of other concerns and planning issues to consider now that the federal government recognizes your marriage.  Make sure you speak with a knowledgeable tax specialist, and/or estate planning attorney to help you sort out what you should do next.