The Supreme Court just struck down the Defense of Marriage Act (DOMA) as unconstitutional. While this will have far-reaching implications social and political implications, it will also have a major financial impact on many people. Let’s take a look at how same sex couples will be impacted (financially) by this change.
Benefits Are Now Wide Open for Married Same-Sex Couples
The Defense of Marriage Act basically ruled that the federal government wouldn’t recognize marriage between same sex couples, even if they were legally married in a state that allowed same sex couples to marry. This meant that same-sex couples weren’t able to file joint income tax returns, share in federal benefits, receive survivor benefits from the government, share in social security benefits, and more. In short, they were treated by the federal government and many states as unmarried couples. This treatment makes financial planning more difficult, especially when it comes to taxes, estate planning, retirement, joint property ownership, and other legal situations.
According to CNN Money, Repealing the Defense of Marriage Act opens the door to over 1,000 spousal benefits that were previously off-limits to same-sex couples (source).
Many couples file their taxes jointly. By doing so, they simplify their tax returns, and can often save money in the process. A good example of when it is helpful is when one spouse is making more money than the other. Combining incomes for the tax return may lower the taxable income rate for the higher earner. However, it doesn’t always work that way. If both couples are making too much money, they may find that they pay more in taxes. The best way to see if you may be affected is to look at the marginal income tax rates. As you can see from the chart below, couples who are “Married, Filing Jointly” don’t always come out ahead.
|Marginal Income Tax Brackets||Single||Married Filing Jointly||Head of Household|
|10% Tax Bracket||$0 – $9,325||$0 – $18,650||$0 – $13,350|
|15% Tax Bracket||$9,325 – $37,950||$18,650 – $75,900||$13,500 – $50,800|
|25% Tax Bracket||$37,950 – $91,900||$75,900 – $153,100||$50,800 – $131,200|
|28% Tax Bracket||$91,900 – $191,650||$153,100 – $233,350||$131,200 – $212,500|
|33% Tax Bracket||$191,650 – $416,700||$233,350 – $416,700||$212,500 – $416,700|
|35% Tax Bracket||$416,700 – $418,400||$416,700 – $470,700||$416,700 – $444,500|
|39.6% Tax Bracket||$414,401 +||$470,701 +||$470,701 +|
Correcting previous tax returns. Some married couples are filing protective refund claims with the IRS for tax returns and estate taxes paid, going back to 2009. You should consult with a tax professional if this may apply to you.
Many large companies already allow same-sex couples to be included on health insurance benefits if they meet certain criteria (not all companies offer this, however, so be sure to check with your employer regarding health insurance benefits). In most cases, health insurance benefits aren’t taxed for the individual and his/her family. However, under DOMA, a same-sex partner who received health insurance benefits was required to pay income taxes on the value of the benefits received. This will change under the new laws. There may also be some complications under the Affordable Care Act, as the law will soon require people to have health insurance, or pay penalties if they don’t carry it.
Estate Taxes and Gift Taxes
Estate planning can be complicated, especially for wealthy individuals. Further complicating estate planning are the limitations on how many assets people can transfer to others, and when. The gift tax, for example, limits how much people can transfer tax-free in any given year to $14,000, and $5.25 million over a lifetime. The catch is that same-sex couples couldn’t easily transfer large amounts of wealth between each other without incurring gift taxes. Additionally, estate taxes took a large bite from estates after one person passed away and left their estate to their partner or spouse. Repealing DOMA removes the gift tax exclusion between married couples and makes it easier to transfer assets within the estate. Again, this can be a very complicated topic, and one where it is always good to seek professional advice.
What Isn’t Covered
These changes only apply to how the federal government recognizes same-sex marriage to couples who were married in a state that legally recognizes same-sex marriages (currently only 12 states, plus the District of Columbia). These changes don’t affect federal recognition for same-sex couples who are in a civil union or domestic partnership (currently recognized by 7 states), or same-sex couples who reside in a state that doesn’t recognize any same-sex unions. In other words, this only applies to marriage, and the federal government is leaving it up to individual states to determine if they will recognize same-sex marriage or not.
Keep in mind these changes listed above are only federal benefits. You will need to check with your individual state to determine if there are any state benefits available to you.
This is obviously a game-changer for many couples. Right now, it’s too early to say how broadly these changes will be interpreted, and how the federal government will treat issues that occurred while DOMA was still in effect. I expect there will be many couples who will try to refile their taxes, or even sue the federal government for previous rulings, especially where there are large amounts of money at stake. (The estate tax is a good example of this). If this affects you, then I recommend watching the news over the coming weeks and months to see how this plays out, and whether you can refile your previous tax returns or make any other corrections. It may also be a good idea to consult with a tax professional or other financial professional to see how this might affect your financial situation.