Same sex marriage and new planning considerations

Same Sex Marriage Equality Sign.jpgKJ: With the repeal of the Defense of Marriage Act (DOMA) and the recent rulings from the IRS, the rights of same-sex couples have changed dramatically, and there are many financial planning implications for the sweeping changes for taxes, long-term planning, gifting, and retirement. Here’s what you need to know about the recent changes and how it may impact your life or the lives of loved ones:

Income tax implications
Married, same-sex couples are now treated as married for federal income tax purposes. Also, looking forward, you are required to either file as married filing jointly (MFJ) or married filing separately (MFS). Typically, it’s better for a married couple to file as MFJ, but please seek professional tax advice to explore the options further. One thing many same-sex married couples may see is that their income taxes could actually increase given that a number of deductions, phase-outs, etc. for married individuals are not simply double the rates of single filers. An additional part of the ruling from the IRS stipulates that married same-sex couples are actually allowed to refile their tax returns going back three years from the date of their tax return filing. This additional feature isn’t a requirement, but if the calculations turn out to be income tax beneficial, then you can file and claim the tax refunds.

Gift and estate tax implications
When two U.S. individuals are married, they can gift an unlimited amount of funds to the other spouse without incurring gift tax consequences. This did not used to be true for same-sex couples, so they had to use their annual gift exclusion (the amount each person can give each other person per year without gift tax consequences – $14,000 for 2013) and their lifetime exemption. Now, with the IRS changes, same-sex couples can enjoy the same treatment from both gift and estate tax systems as other married couples.

Your state of residency doesn’t matter
The IRS recently announced that in order to be considered married for income tax purposes, then you simply have to have been married in a state that recognizes the marriage – regardless if you reside in a state that does not recognize the marriage.

Other considerations
More and more companies are allowing for medical benefits to cover domestic partnerships, and previously, the premiums paid on behalf of a partner were taxed as income to that individual. With the IRS’s ruling, this is no longer the case, and it may help reduce the income tax burden of covering a same-sex partner through employer benefit programs. Additionally, same-sex couples can now qualify as married with respect to benefits at an employer.

What hasn’t been addressed
The IRS didn’t address anything about cohabitation arrangements or civil unions, so those arrangements remain unchanged. The recent IRS ruling only applies to married couples.

There is still a lot to be addressed with other Federal programs like Social Security, but significant changes have been made, and the IRS rulings have paved the way for other benefits and rights to be extended to same-sex married couples. With spousal benefits for Social Security, Medicare, etc. potentially opening up to same-sex married couples in the future, the implications for your benefit amounts could be dramatically different. Consider consulting a tax advisor and financial advisor to explore how the recent sweeping changes may impact you.

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