With more states allowing same-sex marriage or honoring out-of-state same-sex marriages, legally married same-sex couples enjoy more than 1,000 new rights and benefits. Some matters can be complicated if you live in a state that does not allow or recognize same-sex marriage, so it's important to discuss your individual situation with your financial advisor to ensure you understand your rights. If you and your partner are married or making wedding plans, you should be aware of important tax, benefit, estate planning and other changes that may affect your financial situation.
Married same-sex couples are now treated equally in many ways when it comes to a number of tax deductions and exemptions. Personal and dependent exemptions, traditional individual retirement account (IRA) contributions, the earned income tax credit, and the child tax credit are now recognized at the federal level. You may also file jointly and itemize your deductions.
As of September 16, 2013, health insurance purchased for your same-sex spouse can be done on a pre-tax basis, which lowers your taxable income. Previously, same-sex couples could only purchase such coverage on an after-tax basis.
High-earning spouses may face the so-called "marriage penalty," in which your where the combined tax bill is higher than if each spouse filed separately. However, jointly itemized deductions could offset the tax owed. If you were married for all or part of the last three years and jointly itemizing your deductions would have resulted in a lower tax bill or refund, you can file an amended tax return to request a refund of the overpayment. Typically, this can be done up to three years after the date the return is filed or two years from the date the tax was paid, whichever is later.
Employee benefits. Legally married same-sex couples can participate in employee benefit plans, even if the state where they live does not recognize same-sex marriage and health insurance can be purchased with pre-tax dollars.
Same-sex spouses now have equal treatment when it comes to IRAs and qualified retirement plans. In addition to spousal interest in the plan, minimum distribution rules apply. Marriage may also affect how you treat your beneficiary designation forms. If you are a spouse in a same-sex marriage, you should review your beneficiary designations, and how those matters are coordinated with your broader estate planning. Remember that it is your beneficiary designation form and not your will that dictates who receives these assets after you die.
Providing for children requires additional planning. In states that recognize same-sex marriage, both partners are typically granted parental rights. In cases where the partners are not married, or where same-sex marriage is not recognized at the state level, only one partner may be recognized as the child's parent. In this situation, your estate should include special planning to ensure your wishes for the care and custody of your children are clearly stated.
Legally married same-sex couples now enjoy the same federal gift or estate tax benefits as heterosexual married couples. Primarily, those benefits include an unlimited gift or estate tax marital deduction for any amounts passing to a spouse, either as an outright gift or in a trust that qualifies for the unlimited marital deduction. If you're not married, the current gift or estate tax threshold may apply to asset transfers upon your death. The threshold is $5.34 million in 2014.
Recent legislation and an IRS ruling allow "portability," which means that if a deceased spouse has not fully used his or her estate tax exclusion amount to shelter taxable transfers at the time of his or her death, any unused amount can roll over, or "port," to the surviving spouse. Just as with personal claims for personal income taxes you can now file refund claims for personal incomes taxes, you can also file refund claims for gift or estate taxes within the same statute of limitations.
Treatment for same-sex couples on federal tax, retirement and other financial issues continues to evolve. Be sure you are working with a financial advisor, accountant and tax lawyer familiar with this development landscape.
1 FreedomtoMarry.org, February 21, 2014, http://www.freedomtomarry.org/states/.
This article is for general informational purposes only. It is not intended to be used, and cannot be used, as a substitute for specific individualized legal or tax advice. Additionally, any tax information provided is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor, CPA and/or attorney for specific advice based on the individual's personal circumstances. Examples included in this article, if any, are hypothetical and for illustrative purposes only.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.Individual Advisory Services are provided through Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services®, LLC, a Registered Investment Adviser. TIAA-CREF Individual & Institutional Services®, LLC also distributes securities and provides additional brokerage services in its capacity as a registered broker/dealer, member FINRA. TIAA-CREF Trust Company, FSB provides investment management and trust services.
Managed Accounts: You have unique needs; we have the expertise to manage them.