On June 26, 2013, the Supreme Court ruled Section 3 of the Defense of Marriage Act (DOMA) unconstitutional. In doing so, the Court has allowed the definition of “marriage” to be determined at the state level. While not all states have provided same-sex couples with the right to marry, if you are living in one of the 13 states or District of Columbia that currently allow same-sex marriage and have gotten married, then the federal government will recognize the marriage under federal law.
These couples can now receive all the benefits of marriage, including those from a tax perspective. However, one must ask this very important question: For tax purposes is marriage really the way to go? Sometimes married couples incur more income tax than if they were single persons.
Estate Taxes – In the case of U.S. vs. Windsor, Edith Windsor was hit with over $363,000 in estate taxes on her inheritance of her wife's estate. Had their marriage been recognized by the IRS, she could have taken advantage of the tax code provision that no amount left to a surviving spouse outright is taxed upon the death of the first of a married couple to die.
Gifts – In 2013, the annual gift exclusion is $14,000, or $28,000 for married couples. Previously, if one of the partners in a same-sex marriage were to give a gift greater than $14,000 they would be forced to use up a portion of their lifetime exemption from gift tax. If that exemption had been exhausted from prior gifts, a gift tax might apply. Also, gifts made directly to a spouse are tax free, no matter the amount is gifted.
Social Security – Same-sex married couples will now receive Social Security spousal benefits under federal law. A married person who has never worked is entitled to claim benefits if he or she is at the age of 62 and the other spouse is receiving or eligible to receive retirement or disability benefits. They can also apply for Medicare at the age of 65.
Maximum Tax Rates – Computing federal income tax is an instance where higher earning same-sex married couples may get hit with a larger tax bill. For example, in 2013 a single taxpayer will reach the highest (39.6%) tax bracket with an income of greater than $400,000. A married couple will reach that same tax bracket at a joint income level of $450,000, only $50,000 dollars more! This result cannot be avoided by filing separate returns.
Investment income tax – starting in 2013, an additional 3.8% tax on net investment income will be assessed on individuals whose adjusted gross income is above a certain threshold. The threshold is $200,000 for a single taxpayer and increases only to $250,000 for married couples. For two single individuals, the threshold is $200,000 each.
Medicare – The same threshold applies for the additional 0.9% Medicare tax on wages and self-employment income - $200,000 for single and only $250,000 if married.
Itemized Deductions – Once a married couple reaches a $250,000 income level, itemized deductions and personal exemptions begin to be eliminated. If they were single, this would not start to happen until combined total incomes were $400,000.
Dividend Tax Rate – If you are in the highest tax bracket, the federal income tax rate on capital gains is 20% instead of the 15% used for capital gain recipients in all lower tax brackets. The highest tax bracket starts at $450,000 for a married couple, which would be a combined $800,000 in the case of two single individuals.
Tax rules are complicated and not necessarily devised to benefit marriage. Each tax situation is unique, so please consult your tax advisor.