Recent Developments and Planning for the Modern Family
On June 26, 2015, a decision handed down by the U.S. Supreme Court forever changed the lives of members of the LGBT community. With the landmark case of Obergefell v. Hodges, it was established that same-sex couples have the fundamental right to marry under the Fourteenth Amendment to the United States Constitution. For many in the LGBT community, this changed the legal, financial and tax landscape drastically. And while the Supreme Court’s decision simplified tax compliance for married same-sex couples, and made it analogous to that of married heterosexual couples, there still remained several specific and unique considerations for the LGBT community.
The Court’s decision also raised new questions for people outside of the LGBT community. We see today that the traditional family has taken on new dimensions, and that a family consisting of a mother, father and 2.5 kids living happily ever after is no longer always the norm in our society. We now ee a more modern family emerging, with a new household structure. Whether you’re part of an unmarried couple, a couple with one or more spouses on their second or third marriages, a blended family or a same-sex couple, there are many questions and considerations that need to be taken into account when planning in today’s legal, financial and tax climate.
Now begs the question: first comes love, then comes marriage? Whether it is “I do” or “I don’t,” Marcum’s Modern Family & LGBT Services Group suggests careful consideration of the following issues:
- Prenuptial Considerations – A prenuptial agreement is an imperative point of planning. Consider any cohabitation and/or co-ownership
agreements that may be currently in place. Determine how assets acquired prior to marriage held in one person’s name will be categorized and how
assets purchased together are to be categorized. Other premarital considerations and planning opportunities include:
- Recognition of losses from any depreciated assets, and keeping the assets in the family by selling them to the other partner before getting married.
- Once married, couples may want the protection afforded by re-titling real estate from tenants in common or joint tenancy, to tenants by the entirety, which is only available to married couples. Tenants by the entirety provides survivorship rights as well as additional creditor protection.
- Advise your employers of your marriage and review W-2’s closely. Employers may still erroneously be including the cost of a same-sex spouse’s health insurance in employee income.
- Once married, you may be responsible for your spouse’s medical bills. You may disqualify your spouse from receiving Medicaid benefits.
- Tax Advantages and Disadvantages – In keeping with Obergefell, the IRS no longer distinguishes between same-sex marriages and opposite-sex
marriages. The Service now defines marriage for federal tax purposes as two individuals lawfully married to each other, meaning that married LGBT
couples are now able to a federal joint income tax return. In some cases, being married can simplify tax compliance by requiring less time, effort
and expense on tax preparation. A disparity between spouses’ income levels could potentially yield a lower income tax bracket for married couples.
Conversely, combining incomes (usually of a similar level) could lead to a higher tax bracket and eliminate certain deductions and credits that
might otherwise be available to a single filer. This is known as the “marriage penalty.” Other tax considerations include the following:
- Amendment of prior-year income, gift and estate tax returns: If you live or lived in a state that didn’t previously recognize your marriage, you may be able to amend prioryear tax returns, within the statute of limitations, to receive a refund for tax benefits not previously afforded you.
- Miscellaneous deductions/credits: Consider opportunities for deductions and credits related to children within your family unit, such as dependency exemptions, medical deductions for assisted reproduction (e.g. IVF treatments), and adoption credits.
- Tax Attributes: Getting married and filing jointly could lead to tax benefits through combination of tax attributes (e.g., combination of capital loss carryovers).
- Gift and Estate Planning – There are many gift and estate planning benefits available to married same-sex couples. Spouses are allowed
an unlimited exemption from gift and estate taxes for property given to one another, with some caveats. For gifts given to others, married couples
are allowed the benefit of “gift splitting,” which allows spouses to combine their annual taxable gift exclusion amounts, effectively treating
the gift as made equally by the spouses. Also, spouses may combine their federal estate tax exemption (also known as “portability”). The second
spouse to die can leave property up to $10,900,000 exempt from federal estate taxes, if the first spouse did not utilize any of his or her exemption
amount. Unmarried couples do not get the benefit of portability. Other critical estate planning points include:
- Making sure your estate plans are up to date and taking advantage of planning opportunities whether or not you are married. For example, wills that had been prepared before your marriage was recognized may not reflect your wishes under current law.
- Reviewing ancillary documents, such as health care proxies, living wills, powers of attorney, disposition of remains. It’s also important to carry these types of documents with you (on a smartphone or flash drive) in cases such as traveling to states or countries that do not recognize same-sex marriage. This will help to avoid challenges to your legal right to act on behalf of your spouse or children.
- Miscellaneous Planning – There are several other important planning points for modern family and LGBT taxpayers to consider:
- Life Insurance Policies: Consider whether your life insurance policies are sufficient and/or appropriate for purposes of supporting your survivors or paying estate taxes, whether or not you are married. Would “second-to-die” life insurance be more appropriate? Many LGBT couples took out significant life insurance policies to cover the estate taxes they would have incurred if their marriage was not recognized. You may choose to reduce the amount of coverage, but be careful – you may not be able to increase your coverage later, or only be able to do so at a significant increase in cost.
- Retirement Accounts: Review your IRA/401K plan designations. Make sure they are updated for marriage (and divorce), as well as contingent beneficiary designations for children or others, as needed.
- Social Security: Same-sex married couples are now eligible for full Social Security benefits with the Social Security Administration’s August 20, 2015, decision to apply the Obergefell decision.
- Innocent Spouse Protection: If you suspect a case of spousal tax fraud, please consult your Marcum professional to review the “innocent spouse rules,” and to determine if a joint tax return filing should be avoided.
- Charitable Giving: There are numerous ways to make your charitable giving beneficial to both you and the charitable organization, such as charitable remainder trusts and charitable lead trusts. These vehicles may reduce estate taxes for couples who choose not to marry and, thus, cannot avail themselves of the unlimited marital deduction for estate and gift tax purposes.
- Payroll Tax Withholding: Update Form W-4 with your employer to change your status to married and increase or decrease your exemptions.
- Trust vs. Will: Consider creating a living trust. A living trust is an alternative to a will, which requires the next of kin to be notified and is a matter of public record.
UPDATE: IRS Acquiesces to Per-Taxpayer Interpretation of Mortgage Interest Deduction Limits
On August 7,2015, the Court of Appeals for the Ninth Circuit decided that unmarried taxpayers who co-own a residence can each deduct interest payments on home-acquisition and home-equity debt up to the $1.1 million limit in the Internal Revenue Code. One year later, the IRS has now acquiesced to the Ninth Circuit Court’s per-taxpayer interpretation and decision, which means that the Service accepts the holding of the Court. This decision allows individuals who own property together, including business partners, siblings, unmarried couples and others, to double (or more, depending on the number of owners) their mortgage interest deduction when the indebtedness is equal to or in excess of $2.2 million, i.e., each co-owner will be able to deduct the interest on up to $1.1 million of mortgage debt ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness).
The tax legislative forecast is difficult to predict, given the current uncertainty about the direction the United States political climate will take. What is certain is that tax laws will invariably be complex and ever-changing. Marcum’s Modern Family & LGBT Services Group will continue to be the thought leader and a primary resource in the specialty area of tax compliance and consulting services for high net worth modern families, same-sex couples and LGBT individuals. Should you have any questions regarding this specialty area, please review the reference materials located on Marcum’s website (https://www.marcumllp.com/services/tax/modern- family-LGBT-services), or feel free to contact your Marcum professional.