The Supreme Court’s ruling last year on the Defense of Marriage Act has had a momentous impact on financial planning for lesbian, gay, bisexual, and transgender couples. But the momentous impact has little to do with the case at issue.
The focus of the landmark case, United States v. Windsor, was an estate tax issue. Given that it takes millions of dollars in assets to trigger federal estate taxes, hardly any Americans are subject to them. Yet the decision allowing for federal recognition of same-sex marriages has a major influence on the day-to-day financial lives of LGBT couples -- not just the high-net-worth ones -- affecting everything from income taxes to Social Security benefits.
Let’s start with income tax. Married LGBT couples can now file joint federal tax returns. This is a mixed blessing, since filing jointly can mean a lower tax bill for some couples and a higher tax bill for others. Generally speaking, the more disparate the income of two spouses (whatever their gender), the more likely they are to benefit from joint filing. That means that some couples might benefit from amending returns filed for 2012, 2011, and 2010 (which is as far back as the IRS allows), while for others there’s no benefit.
That’s true for me and my husband. I’m a financial planner, he’s a corporate accounting manager, and we got married in Massachusetts in September 2005. If we were to refile past returns, I calculate that we’d end up paying thousands more to the IRS. Going forward, we’ll be one of the many married couples who will end up paying the marriage tax. It’s a price we’re willing to pay.
Some other areas where the DOMA case has a major impact:
- Employee benefits. In past years, if either of us had gone on the other’s health plan, the additional coverage would have translated into additional taxable income for whoever’s plan we were on. That’s not true anymore, and I’ll be joining his plan next January, with no additional taxes.
- Pensions and retirement accounts. Before the DOMA case, same-sex couples couldn’t enjoy the same tax benefits as could opposite-sex couples who listed one another as beneficiaries. I, for example, have a cash-balance pension plan through my work. Previously, I wasn’t able to list my husband as a beneficiary; if I had died, the pension would have gone into my estate and my husband would have lost the tax deferral. Now, it could be rolled directly into his IRA and not create a taxable event.
- Social Security. Now same-sex married couples residing in a state that recognizes same-sex marriage can enjoy spousal benefits, just like other married couples. There’s a caveat, though: If you file for benefits after you relocate to a state that doesn’t recognize same-sex marriage, you would not be eligible for these spousal benefits. That brings me to something I’ve cautioned my clients about: If you move to a state that does not recognize your marriage, some benefits may travel with you and other won’t -- in areas such as state taxes or dying without a will.
- Divorce. No one really wants to think about this part of marriage, but the reality is that the DOMA decision allows for much more flexibility should a marriage break up. If, as a result of a divorce settlement, assets such as an IRA or real estate holdings were split up, a couple might have faced significant taxation. Now, though, those possessions can be divided without generating a taxable event. While I’ve had a good chuckle about this with some clients, it’s no laughing matter really.
One year after the DOMA decision, same-sex married couples, including my husband and me, have celebrated the positive changes that marriage recognition has brought. We’re also more aware of the financial implications -- ones that extend far beyond estate taxes.
Armstrong is a certified financial planner with Centinel Financial Group in Needham Heights, Mass. He has guided clients since 1986 in matters of financial planning, insurance, investments, and retirement. He currently serves on the national boards of the Financial Planning Association and PridePlanners. His website is www.stuartarmstrong.com.