Should the Supreme Court overturn a federal law that defines marriage as solely between a man and a woman, some married same-sex couples will save $8,000 or more in income tax, a new analysis finds.
This week, the court will hear a case challenging the Defense of Marriage Act, a 1996 law that prevents same-sex couples from receiving more than 1,000 federal benefits that opposite-sex married couples receive.
This includes the right to file federal taxes jointly -- which, depending on income, gives some married filers a "bonus" of thousands of dollars, while penalizing others.
A same-sex couple with combined income of $100,000, in which one person earns $70,000 and the other makes $30,000, currently pays an extra $1,625 a year by filing separately rather than jointly, according to an analysis H&R Block conducted for CNNMoney. The calculations assume a standard deduction, no children and no tax credits.
The extra tax liability jumps to nearly $8,000 when one spouse earns all $100,000 and the other reports no income. In this case, couples filing jointly owe tax of $11,858, while a same-sex couple filing separately owes $19,585 -- a 65 percent difference.
Cutting Tax Liability in Half
"[There's] a myth that any time married people file jointly they are worse off than filing singly, and that's just not correct at all -- sometimes they get a marriage bonus," said Jackie Perlman, a principal analyst at H&R Block Inc. (HRB).
That's because filing jointly merges the two incomes, shifting some of the higher-earning spouse's income into a lower tax bracket. In some scenarios, couples would even cut their tax bills in half by filing jointly -- typically when incomes are low, Perlman said.
As the gap between incomes shrinks, however, the difference in tax liability is less pronounced. In H&R Block's scenario, no extra tax is owed when each spouse earns an income of $50,000 and they file jointly instead of individually.
Other couples would end up owing more by filing jointly, especially if they miss out on deductions or credits like the Earned Income Tax Credit and the Child Tax Credit because, when combined, their income is no longer low enough to qualify or receive the full benefit.
Another major tax issue at stake in the DOMA case is the estate tax. Currently, surviving spouses in federally-recognized marriages don't have to pay taxes on their deceased spouse's estate, while same-sex widows pay a 35 percent estate tax on anything in excess of a $5 million exemption.
The case challenging DOMA was filed by New Yorker Edith Windsor, who sued to get back the $363,000 in estate taxes she paid when her partner of more than 40 years died.
Her arguments are being presented on Wednesday. Meanwhile, opposition to the law is growing -- with the Obama Administration, a coalition of big businesses and even a group of prominent Republicans all signing legal briefs in support of gay marriage.
If the court decides to overturn DOMA, it could significantly impact the financial lives of same-sex couples married at the state level. But it's up in the air whether federal benefits would be extended to domestic partnerships and civil unions. Currently, same-sex marriage is legal in nine states and Washington, D.C.
'Small Price to Pay'
In addition to not being able to file jointly and owing extra estate tax in certain cases, many same-sex couples owe tax on medical benefits received through a partner's employer-sponsored health insurance plan, are denied thousands of dollars in spousal Social Security benefits or don't qualify for survivors benefits if a spouse or partner passes away.
Mikey Rox and Earl Morrow, from New York City, would boost their refund by nearly $2,000 a year by filing jointly. And the $2,500 in tax they currently pay on the health insurance benefits Mikey receives from Earl's plan would vanish.
Some couples could even get refunded for the extra tax they paid in the past three years as well, if they file protective refund claims with the IRS and amend their returns to file jointly. Adele and Jennifer Hoppe-House, from Los Angeles, expect to get more than $13,000 back by doing this if DOMA is struck down.
Even for those who would owe more tax if they were allowed to file jointly, the extra money is often a small price to pay to see DOMA overturned.
"I'm sure more people are going to get financial wins than losses, whether it's taxes or Social Security," said Nanette Miller, head of the LGBT practice at accounting firm Marcum LLP. "But it's not just an economic issue -- it's that they want that equality."
How to Do Your Taxes if You're a Same Sex Married Couple
Court's Marriage Ruling Could Save Same-Sex Couples Big Money
First, you should consider hiring an accountant. To help you decide, start with the free Ace Your Taxes Bootcamp, which has a quiz that will tell you whether you need one. Unless the results of that quiz show that you definitely don't need one, you should give it serious thought -- and of course, if you do, pick an accountant who is familiar with the laws surrounding same-sex partnerships. There are several reasons why:
- They will be familiar with the intricacies of your state laws, which vary widely.
- If you live in California, Nevada or Washington, an IRS rule allows registered domestic partners and legally married same-sex couples to split their income, which will have tax implications that a tax accountant can work through.
- You might be subject to the marriage penalty, where combining your finances would bump you into a higher bracket. An accountant can run the numbers for you and tell you whether to change your withholding for next year.
- An accountant can advise you on long-term concerns about special tax penalties related to shared finances and estate taxes, and how to avoid them.
Some states recognize same-sex marriages, while some see them as civil-unions or domestic partnerships, and in others, of course, they are outright illegal. Here are the definitions:
- Civil unions are legal contracts between partners that are recognized as having all or some of the rights of marriage, but without the historical and religious connotations.
- A domestic partnership is between individuals who are living together but are not joined in any type of legal partnership, marriage or civil union. It recognizes the contribution of one partner to the property of the other.
Your state's laws will affect a wide range of issues surrounding taxes, from what filing status you will use, to how your insurance benefits are taxed. You'll have to do research into how your state treats your relationship and whether your state allows you to file a joint return.
If you're in a state that allows you to file jointly with your partner, the two of you will have to file four tax returns altogether:
- One federal tax form for you
- One federal tax form for your partner
- One "dummy" federal tax form together so you can reference it when you fill out ...
Because the federal government does not recognize same-sex marriages, you will have to file as though you are single or face stiff penalties. But at the same time, you are not supposed to lie on your tax forms. What to do? Some accountants recommend that you check the single box, but put an asterisk next to it indicating you are in a legal same-sex marriage. Lambda Legal has also drafted a sample disclaimer you can attach to your return.
If you are working and your spouse is staying at home, or vice versa, the SAHS could qualify as a dependent member of your household, and you could take an exemption for her. To qualify, she must:
- Have earned less than $3,800 in gross income or unemployment benefits for the year 2012
- Have received more than half of her support from you, in the form of food, clothing, shelter, education, medical and dental care, recreation, and transportation
- Be a U.S. resident or citizen, or a resident of Mexico or Canada
For more on exemptions and how they work, read this.
If your spouse qualifies as a dependent, that also means you could qualify to claim education credits if you are paying for her education. To find out more, read this.
Like any married couple, you might share assets like a car, a home and financial accounts. But that makes things more difficult when it comes to taxes because of something called the gift tax. The gift tax kicks in when you gift someone cash or something worth more than $13,000. And because you aren't married in the eyes of the federal government, sharing all your assets like a brokerage or bank account, car or house could be seen as "gifting" them to each other.
Fortunately, there is currently a large exemption, which allows you to gift someone up to $5.12 million over the course of your lifetime. The exemption is in place through 2013, but you'll still need to file a form declaring any gift of more than $13,000.
If you own your home and both of your names are on the mortgage, you can share the mortgage interest tax deduction. You can split it in any way that fits you best, whether that's 50-50 or 0-100 or 75-25.
For more on what homeowners need to know about taxes, read this.
If both you and your partner are legal parents (biological or adoptive) of the same child, either of you may claim the child as a dependent. You could even claim the "head of household" filing status, which has tax advantages over using the "single" filing status. You'll have to decide among yourselves which person will claim the dependent, but if you have two children together, you each may be able to file as a "head of household" by claiming one child as a dependent. If you do decide to do this, make sure you seek advice from a professional first, because this could trigger an audit from the IRS.
Because your state recognizes your marriage, you can provide insurance to your partner through your employer's plan and vice versa. But since the federal government doesn't recognize the marriage, they see that as an extraneous benefit. If you receive health insurance from your partner, you must declare the value of that health insurance benefit as taxable income from your partner's employer on your federal tax return.