In a move that reinforces the rapid shift in public sentiment regarding same-sex unions, the Supreme Court ruled earlier this year that all marriages — and “the constellation of benefits” that are linked to marriage — must be recognized and enforced in all 50 states.1
While the law brings happiness and relief to those affected, it also introduces new legal, tax, and financial issues that must be navigated. On the matter of income taxes alone, there is much that needs to be reviewed and acted upon. Here is a quick summary of some of the major tax planning issues to consider.
For those who intend to tie the knot, marriage generally tends to lower many couples’ income tax burden, especially if one spouse earns a lot more than the other. However, couples who earn about the same — especially high-earning professionals — may face a marriage penalty. For instance, if both parties earn $300,000 a year individually, they could each be in the 33% tax bracket. When their income is combined, $300,000 becomes $600,000 and they could be bumped into the 39.6% bracket.
For previously married couples living in states that did not recognize same-sex unions prior to the Court ruling, there are myriad income tax issues to review. Financial Planning recommends that couples work with their advisors and/or CPAs to assess:2
Prior-year federal and state income tax returns. While all married couples were required to file joint or married-but-separate federal returns from 2013 onward, many states still required some couples to file state tax returns as if they were single. Filing amended state returns for prior years now might reduce past state taxes retroactively. But the amended filings could also effectively increase prior-year federal tax liabilities. Consult your tax advisor to determine whether the potential costs of amended filings might outweigh the desired benefits. You might also consider whether retroactive filing changes could alter the amounts used to figure eligibility for various tax deductions and credits you might have claimed in those years.
Current-year federal and state income tax planning opportunities. Consider revising 2015 Form W-4 to decrease the number of personal allowances to mitigate withholding penalties, if applicable.
Roth conversion strategies, financial aid assistance for children going to college, health savings account (HSA) contributions, and other employee benefits. Determine the most tax-efficient strategies going forward.
The ability to file both federal and state taxes jointly as a couple, and to take advantage of any state-level tax breaks offered to married couples.
If you need help making sense of the new ruling and what it means for you and your spouse’s tax situation, contact your financial and/or tax professional.
1Supreme Court of the United States, Syllabus Obergefell. v. Hodges, Director, Ohio Department of Health et al. (Full text of Justice Anthony Kennedy’s decision), June 26, 2015. 2Financial Planning, “Smart Tax and Estate Planning Tips for LGBT Couples,” July 1, 2015.
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Phil Ratcliff, President of rebel Financial, is a senior financial advisor that holds an AIF®, CFP®, ChFC®, and CLU® certifications. He started his career at American Express Financial Advisors in 2003, then moved to AXA Advisors for 7 years before founding rebel Financial LLC in 2013.