January 2, 2020

Modern Updates for the Modern Family

Related Services Tax & Business, Tax Advisory Services, Modern Family & LGBT Services

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The traditional “nuclear” family is becoming a thing of the past. While same-sex couples are finally able to tie the knot, opposite-sex couples are forming blended families and adopting their step-children. More and more individuals are taking on long-term relationships and not getting married. Additionally, divorce rates are rising, and the average number of children in a family is decreasing. This creates special considerations for the evolved “modern family.” What’s New?

  • Potential Tax Refunds! With the help of the Promoting Respect for Individuals’ Dignity and Equality – or PRIDE –Act (House Resolution 3299), legally married same-sex couples may be allowed to amend their tax returns for all of the years they’ve been married. Current law limits taxpayers who previously filed separate individual returns to file amended joint returns only up to the standard three-year statute of limitations period. If approved by the Senate and signed into law, the PRIDE Act could result in over $60 million in tax refunds. The act also “fixes” one of the many technicalities that still exist in the tax code post-DOMA by removing references to husband/wife/ male/female and providing for gender- neutral language.
  • Elimination of the Alimony Deduction – With the ability to get married comes the ability to get divorced! Divorce agreements signed after December 31,  2018, are subject to new rules as part of the Tax Cuts and Jobs Act of 2017 (TCJA). The spouse who pays alimony to an ex-spouse will no longer be able to deduct the alimony on his or her income tax return, and the recipient spouse will no longer have to include the alimony payment in his or her taxable income. Note,under the new law, a payor spouse can make alimony payments through an individual retirement account, provided the payee spouse is at least 59 ½ years old; otherwise the 10% penalty applies. This “back-door” payment through an IRA may provide a tax benefit for the higher-income spouse by enabling the use of pre-tax dollars.
  • The Working Families Tax Relief Act could help save tax dollars for more than 230,000 low-income same- sex couples and families. Specifically, the bill increases the availability of the Earned Income Tax Credit (EITC) by expanding the age of eligibility. The bill is anticipated to bring more than 29 million people above the poverty line, increasing the LGBT poverty line and child poverty line as well.

What’s Important?

In the midst of a  proposed tax bill specifically aiming to achieve tax equity for modern couples and families, and monumental court decisions, compounded by the uncertainty of the upcoming 2020 elections, some planning tips remain important for modern families in the current environment:

  • The Mortgage Interest Deduction – Two unmarried individuals filing separately (same-sex or opposite-sex) who own property together and pay the mortgage together can continue to reduce their taxable incomes by claiming the mortgage interest deduction on the same residence. For qualified loans secured after December 15, 2017, both individuals can deduct the interest on the first $750,000 of the mortgage ( deceased from $1,000,000 for mortgages secured before that date). Make sure to itemize your taxes, rather than taking the standard deduction, and look out for Form 1098 from your mortgage lender.
  • Cohabitation Agreements and Prenups – Couples cohabitating, whether married or unmarried, should formalize a legal agreement to protect either partner’s real estate or  other assets. Entering into a Cohabitation Agreement or Prenuptial Agreement can protect the interests of both parties, avoid future conflicts, and properly distribute the property in the event of a break- up or death.
  • Love, Marriage and Taxes? Newlywed same-sex couples across the U.S. are befuddled when it comes to  choosing whether to file their taxes as “married filing jointly” or “married filing separate.” Much of the confusion comes from the infamous “marriage penalty” tax, where  combining incomes leads to a higher tax bracket and disqualifies certain deductions and credits. Filing joint or separate depends on each couple’s particular situation, including whether one spouse earns substantially more, has significant medical expenses, or is eligible for qualifying child/dependent care or adoption tax credits. It is advisable to ask your accountant to forecast your taxes under both scenarios.
  • Estate Planning – Don’t forget to review your beneficiary designations! Is your will up-to-date? Have you named guardians for your minor children? Who is your healthcare proxy and power of attorney agent in the event you are incapacitated and unable to make your own decisions? Does your  living will  make clear your intentions in the event of medical incapacitation? Should you take advantage of the current federal lifetime gift  exemption of $11.4 million? It is a good idea to review your existing estate plan and consider making annual gifts before the year-end.