Small Business Taxes & ManagementTM--Copyright 2013, A/N Group, Inc.
The landmark decision by the U.S. Supreme Court in Edith Schlain Windsor, In Her Capacity as Executor of the Estate of Thea Clara Spyer, et al. held that the federal definition of marriage (between a man and a woman) contained in the Defense of Marriage Act is unconstitutional. While this provides substantial benefits to same-sex couples, it creates a plethora of new questions. The discussion below is just a cursory look at some of the issues the ruling creates.
Before continuing, keep in mind that if you're not in a state that recognizes gay marriage, there will most likely be no impact on you, unless you own a business. Some states only recognize civil unions, not gay marriage. The IRS will now allow a same-sex couple who are married to file a joint return. And, if a couple is legally married in a state that recognizes same-sex marriage and moves to a state that doesn't, are they still entitled to the same benefits? For example, as New York residents (where same-sex marriage is recognized) you may be able to file jointly. You and your spouse move to Florida, where the marriage is not recognized. Will you file as married when you live in New York and single after moving to Florida. Would you have to file married for the portion of the year you live in New York and single for the part of the year you live in Florida?
At this time 13 states recognize (or will soon recognize) gay marriage. Seven states provide some sort of domestic partnership. Certain populous states, notably Texas, Florida, Georgia, Ohio, North and South Carolina, and Pennsylvania have no provision for same-sex couples. More than likely, as a result of the Supreme Court ruling, a number of other states will recognize same-sex marriages.
This is the one that will affect the most people and have the most dollar impact. Some of the changes will be obvious, some more subtle.
Filing Joint. Couples will be able to get the benefits of filing jointly. The benefits can be significant if one spouse has high income and the other little or no income. Conversely, couples whose earnings are similar are likely to find their overall taxes will increase. But the thresholds for many phaseouts will also be adversely affected. For example, if both spouses have rental properties and are now taking net losses, they may find when their incomes are combined they're no longer able to do so. Filing as married, separate, will result in them not being allowed to take any losses. (The losses aren't permanently lost, just deferred.)
Keep in mind that you won't have a choice. If you're married you must file as married joint or married separate. And if you decide to stay single you've got to file as single or, if you qualify, head of household. Dependents. Couples with children may be better able to utilize the exemptions, child credit, adoption credit, etc.
But taxpayers who can file as head of household may be better off unmarried. For example, Sue and Mary are unmarried and have each adopted a child. They both have about the same taxable income. If they each can file as head of household they will be better off single. The combined tax from filing as two couples filing as head of household will be less than the two partners filing as married.
Phaseouts. The law contains a number of phaseouts. For example, you start to lose your itemized deductions when your AGI exceeds $300,000 on a joint return. For a single return, the threshold is $250,000. Clearly, two single taxpayers will do better than a married couple. Likewise, where taxpayers are participants in a qualified pension plan, their IRA deduction phases out at $95,000 for a married couple and $59,000 for a single individual. The cost of these phaseouts is difficult to ascertain without going through the calculations.
IRA distributions after death. An IRA inherited from a spouse enjoys beneficial status. The beneficiary can treat the IRA as his or her own. That can be a very important benefit. Review the beneficiaries on your IRAs (and other pension plans). You may have to make changes. Amended returns. While this is far from resolved, it's anticipated that couples will be able to amend returns for prior years to file jointly and take advantage of other benefits. Ancillary questions include whether you may be precluded from certain elections that can only be made on an original return and how far back you can amend. You might want to file a protective amended return if you're approaching the end of the statute of limitations. There's a question whether you will have to file an amended return for all open years. Some of these questions can only be answered by the IRS and it's presumed the Service will issue guidance as soon as they can.
Estate taxes. This was the reason for the Supreme Court case and, for more than a few taxpayers, this could be the big one. A married same-sex couple qualify for the full $10.5 million exclusion available to other married couples. Property transfers between a married same-sex couple now qualify for an unlimited gift tax exclusion. And same-sex married couples can split gifts for the annual gift tax exclusion, allowing a total gift of $28,000. Married couples who have wills should have them reviewed. There's a good chance you can get more benefits with far less complexity.
Divorce. If same-sex marriage is recognized, so will same-sex divorce. The same rules will almost assuredly apply to divorces, including the definition of whether a couple are still married and the inclusion of alimony in income and the deductibility of alimony payments.
Running the numbers. What should you do if you're not married now? Get married? If married, should you get "unmarried" by moving to a state that doesn't recognize a same-sex marriage? While the tax numbers are usually the big financial factors, there are many other considerations. Some will be discussed below, some are personal. But if you've got anything more than a very simple return (and few returns are simple these days) there's no easy way to arrive at the optimum tax approach. You've got to go through all the numbers both as a married couple and single individuals. Fortunately, it's not that bad with tax software. If you prepared your own 2012 return using a tax program, you should be able to create another return using pro forma numbers for a married status. Most programs have projection schedules that allow you to run the numbers using 2013 tax law. That's important because there were a number of important changes, particularly for higher-income individuals, made in January.
Moving? When you're doing your analysis you can't stop at what will happen if you get married in, say New York. Consider what will happen if you want or have to move to a state that doesn't recognize same-sex marriage. You may have to redo your estate plan, etc.
This is one of the areas that will affect the most people--and not just same-sex couples. Employers may have to deal with a range of benefit plans. But the one affecting most employers will be health care. You should check with your benefits manager for guidance on how to handle some of these changes. Handling the changes may be as easy as simply informing any workers who are in a same-sex marriage that they will now on the same footing as other married employees. That's because the only thing that's changed is the definition of the work marriage. Check with your benefits manager.
Same-sex couple coverage not taxable. If an employer provides health insurance coverage to a person who is not an employee or an employee's dependent, the benefit is taxable and must be included on the worker's W-2. That rule applies to same-sex couples who aren't married. Under the changes, the benefit will no longer be taxable. The same applies to flexible spending accounts, health savings accounts and health reimbursement arrangements.
Health insurance coverage. Employers who provide insurance coverage to employees will have to include the spouse of a same-sex married couple. That could make increase the cost of health benefits. But if both spouses can be covered under a company plan, there's a chance your employee could opt to be covered under his or her spouse's plan. It may be a positive or negative, but it's an area you're going to have to deal with.
Retirement plans. Because spouses have a right to a share of their spouse's retirement benefits through qualified plans COBRA and Family Medical Leave Act. COBRA and FMLA rules should now apply to same-sex married couples. Presumably the way to handle the change is to simply treat the same-sex couple the same as you would any married couple.
Social Security benefits. Spouses of same-sex marriages should now be entitled to the same benefits as spouses in opposite sex marriages. It's expected the Social Security Administration will rule on this issue in the near future. More Questions
Questions.There are many questions left unanswered. What's the status of a civil union? States with civil unions could legalize same-sex marriages. What's the timing? In many cases individuals and employers need guidance from the IRS, Department of Labor, etc. before proceeding. That's not going to happen overnight. In some cases the rules may be retroactive.
What should you do? If you're in a relationship, don't jump into anything. There's much here to evaluate. If you live in a state where same-sex marriage is possible and you're not married, evaluate all your options before committing. You should get sound advice first. There are many issues to consider. The law change requires a look at virtually all your financial planning. And, just like in any marriage, a prenup or postnup should be a consideration.
Copyright 2013 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 07/01/13