Craig W. Mullenbrock, CFP®
January 24, 2014
The Supreme Court’s ruling to strike down section three of the Defense of Marriage Act (DOMA) in June 2013 changed the financial landscape for same-sex couples in America. Prior to the court’s ruling, DOMA had barred same-sex couples from being recognized as spouses for the purpose of federal laws. They also were not able to take advantage of the benefits of marriage as recognized by the federal government. The court’s ruling completely reversed that.
With an increasing number of states recognizing legal marriage for same-sex couples, the primary impact of the ruling has to do with federal recognition of those marriages. The Court’s ruling opened the door for same-sex married couples to follow laws in a way that was previously restricted to traditional married couples. The rules are most clear-cut for married same-sex couples who reside in states that recognize their marriage (approximately one-third). But many federal agencies, including the IRS, will recognize same-sex marriage based on the “state of celebration” standard. In other words, as long as the marriage took place where it is legally recognized, they will be treated as married for federal tax purposes, regardless of whether the couple resides in a state where same-sex marriage is recognized. However, rules pertaining to different financial issues vary depending on each federal agency’s interpretation. A wide range of ramifications The new status of legally married same-sex couples will be reflected in a number of notable changes. Here are some of the most important for same-sex couples to prepare for today.
Income tax filing status Legally married same-sex couples, regardless of where they live, will generally file their tax return with a married couple status (either married filing jointly or married filing separately). If this applies to you, it is important to review your tax withholding and possibly even have a “mock” tax return prepared in advance to make sure you won’t be subject to penalties for underpayment of taxes going forward. If you were legally married at the end of 2013, then you must use a “married” status when filing your federal income tax return for 2013. If the marriage occurred earlier, amended returns can be filed as far back as 2010, but this is optional and generally done only if an amended return would be financially advantageous for you. State laws will dictate when the “married” filing status can be used with state income tax returns. If you are eligible to file a federal tax return as “married,” but live in a state that does not recognize same-sex marriage, you will likely be required to file state returns as single tax filers. You may need to ask your tax preparer to provide you with a copy of an alternative federal return created as a single filer to use with your state return.
Social Security Same-sex married couples can now apply for spousal Social Security benefits and may be able to claim a survivor’s benefit when one spouse dies. While the Social Security Administration is still working to finalize all the rules regarding same-sex couples, you should apply for benefits that you may qualify to receive, in order to preserve your filing date even if your eligibility status is uncertain.
Estate Planning Same-sex couples with a recognized legal marriage can take advantage of the unlimited marital deduction on estate and gift taxes at the federal level. The “portability” provision features of the estate tax exclusion for married couples also now apply to same-sex spouses, which allow an election to transfer any unused exclusion amount to the surviving spouse. This can result in a significant tax savings compared to previous law. Keep in mind that these changes relate to federal estate tax laws. State laws vary, and it is important to understand the estate tax rules that apply in your state.
Beneficiary designations You should review all beneficiaries named on health care directives and power of attorney forms as well as on your workplace retirement plans, IRAs, insurance policies and bank accounts to assure that all appropriate individuals are named. Special rules apply to workplace retirement plans. In certain cases, a legally recognized spouse (that now includes same-sex couples) is automatically considered the beneficiary of your account unless the spouse beneficiary signs a consent form allowing you to name a different individual. Beneficiary designations are important, because they supersede any designations listed in your will and are given legal priority in most situations.
A lot is changing – ask for guidance Talk to your financial, legal and tax advisors to make sure you understand all of the ramifications of the new environment for same-sex couples before you make any important financial decisions.
Mullenbrock is financial advisor and franchise owner of Mullenbrock & Associates-a financial advisory practice of Ameriprise Financial Services, Inc.