Tax Planning for Same-Sex Married Couples

Tax Planning for Same-Sex Married Couples

The Supreme Court’s June decision to allow same-sex marriage in all 50 states has broad federal and state tax implications that every financial adviser should know about. The ruling influences a spectrum of tax and compliance issues for same-sex married couples, ranging from estate, retirement and income tax planning to healthcare benefits, long-term financial planning and tax return preparation.

The Obergefell v. Hodges decision means that same-sex married couples are entitled to the same rights and benefits available to heterosexual married couples. Gay couples who are married will now be able to file joint state tax returns, inherit property and have the same hospital-visitation rights as opposite-sex couples, among other benefits.

Here is a summary of some recommendations we've gathered from the American Institute of CPAs (AICPA) and other experts to help CPAs navigate the terrain of tax planning and preparation for same-sex married couples:

Identify and meet with clients affected by the ruling

Make an appointment to meet with your married same-sex clients to review the tax-benefit and asset-protection implications of the court’s ruling. Many of the stopgap approaches you may have taken in an attempt to mirror traditional married clients will need to be revisited and replaced.

Couples must say “I do” to filing federal and state income taxes as “married.”

Same-sex married couples must decide whether to file joint or separate tax returns. Filing a joint return generally places an individual in a lower tax liability category. Same-sex couples are now eligible for deductions and credits available to all married couples. This applies retroactively to open-year returns; therefore, couples who married prior to the ruling should consider filing amended returns for refunds for past years.

Weigh the pros and cons

In a blog post, Baldwin Accounting CPA, P.A., a public accounting firm in Orlando, Florida, cautions that filing jointly can lead to a higher tax bill if both spouses are high earners or one or both previously qualified to file as head of household. The firm recommends discussing the following tax issues:

  • Head of household filing status — A client who is married and living with his or her spouse can no longer file using head of household status. Instead, the same-sex couple will file as married using the joint or separate status, which will generally result in higher taxes.
  • Standard vs. itemized deductions — If your client chooses to file as unmarried, one spouse can take the standard deduction, and the other can itemize. As married individuals, they must choose one option, which could reduce their overall deductions. If a same-sex married couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.

Significant benefits include gifting without tax implications

Michael Cohn of Accounting Today writes that same-sex married couples will now be able to make unlimited gifts to each other without having to worry about gift-tax implications. Cohn said the ruling will enable married same-sex couples to:

  • Leave property to each other without the survivor needing to pay estate taxes.
  • Leave an IRA to the surviving spouse as a tax-favored rollover IRA.
  • Qualify as a surviving spouse when determining Social Security benefits. If the deceased spouse was receiving a higher Social Security benefit than the surviving spouse, the surviving spouse can thus qualify for the higher benefit.
  • Qualify as a spouse for health insurance benefits and visit a spouse in the hospital.
  • Sue for divorce with fewer complications.

Other important considerations

  • Health coverage — The AICPA recommends that same-sex married couples review their health coverage options. For many same-sex couples, spouse coverage under an employer’s health plan was previously a taxable benefit, which may have meant they chose the cheaper option to minimize the tax bill. As they no longer have to pay taxes on that coverage, they may want to reconsider which coverage is best.
  • Risk management and insurance planning The court’s ruling has removed barriers to insurable interest, coordination of coverage and beneficiary designation, which have long been challenging issues for same-sex married couples, notes AICPA’s Tom Tillery, vice president and CCO of Paraklete Financial. As a result, existing contracts will need to be reviewed and insurable interest and coordination of insurance coverages revisited. Two umbrella policies may now be consolidated into one.
  • Survivor benefits — For same-sex clients, a will contest has often been an issue. A common solution was to develop a revocable living trust, but is that still applicable under the new marriage? One solution is to draft a new trust reflecting the couple’s married status and have the new trust purchase the life insurance policies from the old trust — with a note, Tillery advises. Another option is for clients to revise their will, adding their spouse as a beneficiary. Clients will want to consider doing this with life insurance and retirement plans and adding their spouse’s name to other accounts, mortgages or leases, as appropriate.

As a result of the Supreme Court’s historic ruling, same-sex married couples will no longer have to deal with a two-tiered system of being treated as married for federal tax purposes but not for state tax purposes in states that did not recognize same-sex marriage. This may streamline tax filing for some couples and complicate it for others. Tillery suggests CPAs “proceed slowly and with caution” in addressing tax planning for same-sex married couples. 

The advice provided on this website is general advice only. The information is not intended to be and does not constitute financial advice you should offer your clients or that one should take without first consulting with their financial advisor.