The recent U.S. Supreme Court’s ruling on the Defense of Marriage Act (DOMA) has federal tax and other implications for legally married same-sex couples.
The Internal Revenue Code generally provides married individuals with more tax advantages than it provides for two single taxpayers filing separately, but not always.
Marriage Tax Bonus
When two people are married, filing a joint return usually results in a lower combined federal income tax bill than if the couple was unmarried and filing separately, but that’s not always the case (see Marriage Tax Penalty below). Let’s take the example of both spouses each having a taxable income of $84,850 a year. As 2 individuals, they would each pay $17,891 in tax, for a total of $35,782. However, as a couple, declaring combined income of $169,700, they would pay $34,069. This is a savings of $1,713.
Marriage Tax Penalty
When both spouses have good amounts of taxable income, the total Federal income tax may, in fact, be higher than if the two were taxed as individuals. Let’s take the example of each spouse having taxable income of $183,250 a year. As a single filer, each would pay $44,603 in Federal Income Tax, a combined total of $85,206 in tax. However, filing jointly as a couple (with combined declared income of $366,500), they would pay $97,258 in taxes, or an extra $12,052.
It seems that, with the Court ruling, there is no requirement to file an amended return.
Employer Benefits are Tax-Free
When a couple is married, one spouse can receive some tax-free benefits from the other spouse’s employer, such as tax-free healthcare coverage. However, that is not true for unmarried couples and in that case those same benefits would be taxable.
Inherited Retirement Accounts
When two individuals are married and one spouse dies, the surviving spouse can roll over the deceased spouse’s retirement plan balances into their own plan, rather than receiving them as an inherited plan. This allows the surviving spouse to postpone taking annual distributions until age 70 ½ as opposed to being forced to take distributions starting the year which follows the spouse’s death.
Gift and Estate Taxes
Two individuals who are married can make unlimited gifts to each other while still alive without any federal gift or estate tax consequences. Unfortunately that is not the case for unmarried individuals, who are generally limited to tax-free gifting of $14,000 a year.
When one spouse dies, the surviving spouse can be left an unlimited amount via a will or trust with no federal estate tax implications. This can be a significant benefit for those couples with estates over $5.25 million.
Alimony Payments are Deductible
Certain court-ordered payments to an ex-spouse (such as alimony) are now a tax deduction for the person who is paying the alimony and a taxable amount for the person receiving the alimony. Previously, transfers of money between unmarried individuals were not deductible, and may have been treated as gifts.
Other Implications for Same-Sex Couples
Even with the Supreme Court decision we still have to wait and see the outcome in other areas including Social Security benefits, employee benefits, benefits for military spouses and for immigration-related issues (as when a spouse applies for a green card for the other spouse).
As always, check with your tax professional for specifics in your particular situation. This article is not intended to provide tax advice.