Same-Sex Marriage Financial Impact

Same Sex Marriage Ruling from the U.S. Supreme Court – Decided – June 26, 2015

Key Points of the Ruling:

1 – Same-sex marriage is a right guaranteed by the 14^th Amendment

2 – States must license and recognize same-sex marriage

3 – States must recognize out-of-state same sex marriages

Impact

No more conflict between federal and state laws and taxation
More same-sex couples can be legally married (in states that previously did not permit it)
Relation to the 2013 U.S. Supreme Court decision in Windsor:
Windsor recognized Federal benefits for legal same-sex marriage while this case (Obergefell v. Hodges) allows same-sex marriage in all states and in turn allows more same-sex married couples to take advantage of Federal tax benefits.

The following Tax Benefits are now available to same-sex married couples in all states:

Retirement Planning
IRA Spousal Benefits
– Spousal IRA contributions (or spousal Roth IRA contributions)
– Spousal IRA rollovers at death
– Splitting retirement plans in a divorce – A spilt, if any, will no longer have to be a taxable distribution
RMDs
– Can use Joint Life Expectancy Table for a spouse more than 10 years younger
– Can recalculate for inherited spousal IRAs
– On inherited IRA – Surviving spouse can wait until deceased spouse would have reached age 70 ½, rather than beginning RMDs on the inherited IRA in the year after death
– If no beneficiary is named on the beneficiary form – now treated as a spouse for default provisions of plans or IRAs
Qualified Plan Benefits
– Spousal protection under ERISA
– QRDO exception to 10% early distribution penalty or rollover option for divorce
– Cannot change beneficiary of employer plan without spouse’s consent
– Cannot take employer plan withdrawals without spouse’s consent

Federal Income Tax Planning

Federal Income Tax
– Joint tax returns must be filed – no longer have to file two returns instead of one- can save tax preparation fees
– No need to file single on state and married on Federal for states that previously did not recognize same sex marriages for tax purposes
– Can now claim each other’s deductions, for example, medical expenses

Estate Planning

Federal Estate and Gift Tax
– Tax free lifetime transfers – gifts to the spouse
– Unlimited marital deduction – including QTIP trusts
– Gift-splitting
– Portability of estate or gift tax exemptions
Other Issues:

– Can now sponsor each other for citizenship

Social Security
– Survivor benefits

Downside of Ruling (for tax purposes)

– The marriage penalty – no more benefit to filing as two single individuals
– No use of two single threshold amounts for each spouse:

Top tax rates – income and long-term capital gain and dividend rates:
$826,400 ($413,200) for each single taxpayer) vs. $464,850 (married-joint)

3.8% Investment Income Tax
$400,000 ($200,000 for each single taxpayer) vs. $250,000 (married-joint)

0.9% Medicare Tax on Earned Income
$400,000 ($200,000 for each single taxpayer) vs. $250,000 (married-joint)

Phase-Out of Itemized Deduction and Personal Exemptions
2015 Phase-out begins after $516,500 ($258,250 for each single taxpayer)
vs. $309,900 (married-joint)

Essential Tax and Estate Planning to Protect Assets of Same-Sex Married Couples

Update all key legal documents to identify as a “spouse”
Check beneficiary forms on all plans and IRAs – primary and contingent beneficiaries
Check beneficiary forms for employer benefits, life insurance, annuities
Update wills and trusts – check provisions for children – guardians
Have proper documents for end of life decisions
– Living Wills and Health Care Proxies
– HIPAA Authorizations – The Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy and Security Rules
Provides access to personal health information
Powers of Attorney should be updated
Spousal rollovers may be a better option for spouses who inherit after age 59 ½
Update online accounts – financial websites, email accounts, social media accounts, and storage accounts such as those for documents, music or photos