The Impact of Marriage Equality on Same-Sex Couples: It’s Not Just an Income Tax Issue
Article

The Impact of Marriage Equality on Same-Sex Couples: It’s Not Just an Income Tax Issue

by Jonathan March
July 28, 2021

Same-sex couples received several decisions from landmark court cases at the federal and state levels from the late 2000s through 2015, when the Supreme Court ruled in Obergefell v. Hodges. Obergefell overturned and clarified many state laws by allowing same-sex couples the fundamental right to be married in all 50 states. The Obergefell ruling created clarity for same-sex couples for federal and state tax reporting and removed many tax reporting complexities.

Prior to the 2015 decision in Obergefell, there was a disconnect between the definition of marriage at the federal and state levels. Some states allowed same-sex couples the right to marry or form domestic partnerships, and other states prohibited same-sex marriage entirely. This created filing complexities for married same-sex couples who filed in multiple states that had different definitions of marriage (and thus created different filing statuses). Obergefell paved the way for federal and state rules and filing statuses to mirror one another and create parity for married same-sex couples and opposite-sex couples.

While income taxes were one of the original topics of discussion that the change in the law clarified, there are many more considerations, such as estate planning, divorce, Social Security benefits, retirement plans, and other employee benefits that impact same-sex couples

What You Need to Know

  1. Consistent Filing Status Across All U.S. filingsObergefell requires all states to license same-sex marriages and recognize same-sex marriages from other states, thus creating consistency in the U.S. for filing status for same-sex couples. The filing status of a same-sex married couple should be the same for federal and state purposes (states are no longer able to treat same-sex married couples as single individuals).

    Prior to Obergefell, some states like California offered same-sex couples the option of being domestic partners and provided similar benefits to married couples. The IRS ruled that it will not treat same-sex domestic partner relationships as a same-sex marriage; those in a domestic partner relationship must get legally married in order to be treated as married for federal purposes.
  2. Tax Opportunities of Filing a Joint Tax Return – For some same-sex married couples, the opportunity to file a joint return may create a tax savings depending on the makeup of their income, deductions, and the credits of both spouses that can be reported on the tax returns. Generally, filing using the married filing separate returns creates more limitations on each spouse related to itemized deductions, loss limitations and available credits. A married filing joint return reports all income, deductions, and credits of both spouses on the same tax return.
  3. Divorce – The legalization of same-sex marriage also brings the reality of same-sex divorce. While each state has their own rules about how to approach divorce, same-sex divorce is allowed in all states. There may be complications in a same-sex divorce if there was a domestic partnership or civil union registered with the state prior to the legalization of same-sex marriage. As with any divorce, the same-sex couple should consult legal counsel about the process and complications specific to their situation.
  4. Social Security – Same-sex married couples receive the same benefits from the Social Security system as those in opposite-sex marriages. These benefits of marriage might include higher benefit amounts based on the relationship status, children of the same-sex couple receiving benefits, and benefits available for surviving or divorced spouses.
  5. Employee Benefits – Many companies offer employee benefits that can include a spouse, such as health insurance and life insurance. Federally recognized marriages of same-sex couples qualify for the same employee benefits as those of opposite-sex couples. After Obergefell was determined, all companies offering benefits to opposite-sex spouses of an employee were also required to include the same benefits of the plan for employees with a same-sex spouse. Depending on the state, similar employee benefits are allowed for same-sex couples in a domestic partnership.
  6. Retirement Plans – The same rules that apply to opposite-sex married couples apply to same-sex married couples relating to retirement plan distributions. The SECURE Act of 2019 creates more beneficial options for surviving spouses who inherit retirement accounts, which are attributed to same-sex couples who were married when the account owner died. The surviving spouse has more flexibility and can use their life expectancy for required minimum distributions.
  7. Marital Deduction – Another benefit of same-sex couples being married is the availability to use the marital deduction at the first spouse’s death. The marital deduction allows the entirety of the estate of the first spouse to die to transfer tax free to the surviving spouse. In a community property state, assets held directly by both spouses get a step up in basis to the fair market value at the date of death of the first spouse to die.
  8. Gift Splitting – For the 2021 tax year, the annual gift exclusion is $15,000 per person. The benefit of being married is being able to double the annual gift to each person or family member by each spouse gifting up to the full $15,000 per person without using up any lifetime exemption of either spouse. Same-sex married couples can split gifts of separate property, which is a benefit available only to married couples.
For questions or tax planning assistance, contact our Private Client Advisory Tax team.

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David Erard - Partner - Tax| Armanino
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