Tax Issues Facing the LGBTQ Community Explained
After a decades-long battle for marriage equality, a federal court case was ratified requiring all states to license and acknowledge marriage between same-sex couples.
Prior to this, ambiguous laws caused the LGBTQ community to face all kinds of significant financial challenges including how to file taxes, plan for retirement, and the use of spousal benefits such as life insurance, social security, and estate planning. While the law is clear about the married status on federal documents, it is less clear in the cases of spousal privileges.
The 2015 Supreme Court decision does require all legally married same-sex couples to file their state income taxes as married (although they may file jointly or separately). Just like heterosexual couples, the choice of which filing status to claim depends on which option gives the highest financial benefit for the couple.
In a poll taken by Credit Karma, more than one third of same-sex couples who married between 2013 and 2017 are confused about their tax-filing status, particularly about whether they should file jointly or individually as a married couple. In general, for all couples, the “married filing jointly” status allows for the highest standard deduction, lowest tax bill and more tax breaks. But of course, there are downsides – in this scenario both spouses are responsible for taxed owed on a joint return, regardless of if they earned income in the taxable year or not. In these cases, it may make more sense to file separate returns.
Most married same-sex couples will pay less in taxes, but for some with significant income, their tax liability may actually increase. Due to this unfamiliar territory for same-sex couples, it is critical that they consult with an experienced professional who has done research and knows the specifics of these issues.
Here are a few keys points to consider:
Married couples who file jointly and have large disparity in their income will likely reduce the amount of taxes they pay overall.
A married couple with similar incomes, however, will likely not see much difference in the amount they pay. In the instance where both partners are high-income earners, the tax bill may increase with a joint filing. In that case, separate tax filings would make the most sense.
For married couples who decide to file jointly, the special tax brackets may produce a smaller tax bill (i.e. marriage bonus), or the brackets may result in a higher tax bill than if the individuals had remained single (i.e. marriage penalty).
It’s important to remember that while couples who are legally married can file as such on their federal tax returns, couples in domestic partnerships cannot. The rules around domestic partnerships aren’t very clear, and automated tax services aren’t equipped to handle that relationship definition. In these cases, it is especially critical to use an experienced financial planner and/or tax preparer. We will be sharing more information about these financial issues facing the LGBTQ community, including domestic partnership issues, in future blogs over the next few months so keep an eye out. In the meantime, if you have any questions, please don’t hesitate to reach out to me – initial consultations are always free of charge.