Last month, the Supreme Court made a landmark decision when it struck down Section 3 of the Defense of Marriage Act. The move effectively grants married same-sex couples the same marital rights and privileges afforded to heterosexual couples under federal law. This includes access to the same retirement benefits and health coverage along with some significant tax benefits. Now that DOMA is considered unconstitutional, there are several key areas that married same-sex couples may want to address as part of their tax planning strategy.
As a result of the Supreme Court’s decision, same-sex married couples will now have the option of filing jointly or separately. The biggest advantage of filing jointly is that it typically tends to result in a smaller tax bill. However, if both spouses are high earners, they could end up owing more in taxes than if they filed individual returns due to the marriage penalty. Filing a joint return also makes it easier for married couples to claim dependents and to qualify for certain deductions or credits, which could put more money back in your pocket when you file.
Prior to the Court’s ruling, federal estate tax rules allowed married couples to transfer an unlimited amount of assets from a deceased spouse to their surviving spouse without having to pay any tax using the estate tax exemption. Married couples could also elect to pass on any unused estate and gift tax exemption (up to $5,250,000 in 2013) to their surviving spouse. Both of these benefits are now available to same-sex married couples. Surviving same-sex spouses also have the added benefit of being able to go back and file an amended estate tax return to claim a refund for any estate taxes paid on a deceased spouse’s assets within the past three years.
Federal tax law allows heterosexual married couples to gift unlimited amounts of cash tax-free while same-sex spouses were required to pay taxes on gifts exceeding a certain amount. Now, same-sex spouses have the ability to gift any amount of money to one another without getting hit with a gift tax. Married same-sex couples can now also qualify for gift-splitting, which allows them to share gifts that are given individually for tax purposes. As of 2013, same-sex spouses can use the gift-splitting rule to gift up to $26,000 to someone tax-free.
The tax benefits of the DOMA ruling also extend to retirement planning. Same-sex spouses are now eligible to receive survivor and death benefits from pension plans, 401(k) plans and other qualified retirement accounts. If one spouse needs to take a hardship withdrawal from a 401(k) to cover medical expenses or tuition costs, they’ll be exempt from the ten percent early withdrawal penalty. Same-sex spouses who inherit funds from a deceased spouse’s retirement account will also be able to roll the money into their IRA and they won’t have to begin taking required minimum distributions until they reach age 70 1/2. The new guidelines also allow working spouses to contribute money to a spousal IRA for a non-working same-sex spouse.