The road to marriage for same-sex couples is now possible and clear. With all its rights and responsibilities, the road after marriage may be a little less so. As we near the end of another tax season, let’s get some clarity around taxes for same-sex spouses.
Married Filing Jointly vs. Married Filing Separately
For most same-sex spouses, this question on how to file taxes is new but important because of the risk of incurring the dreaded marriage penalty. The marriage penalty occurs when married couples with similar incomes are bumped into higher tax brackets than when they filed as individuals or if they were to file separately. On the flip side, a marriage bonus can occur when there’s income disparity between spouses that pulls their average incomes into lower tax brackets.
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To be sure, most married couples file jointly. However, if one or both of you owe back taxes or child support, either of you has income-based student loan payments, or both of you have high incomes, filing separately may make sense for you.
If you choose to file jointly, you may qualify for tax credits that you couldn’t qualify for if you file separately. These can lower the net total taxes you pay. Some of these credits include:
- Earned Income Credit
- Lifetime Learning Credit
- Child and Dependent Care Credit
- Adoption Credit
- American Opportunity Credit
Filing separately has its benefits, though. There are some deductions that require a percentage of Adjusted Gross Income (AGI) and are more easily achieved with the lower AGI from filing separately rather than jointly. AGI is the total of all income minus certain deductions. These deductions include:
- Self-employed health savings account deductions contributions
- Contributions to some retirement accounts
- Investment expenses
- Unreimbursed employee business expenses
It’s important to note that filing separately, however, disqualifies filers from taking some deductions important to younger tax filers, such as the student loan interest or tuition deductions.
Claiming a Child as a Dependent
For married couples who file taxes separately, only one spouse per child can claim a child as a dependent. Likewise, if a couple is divorced – only one spouse can claim a child as a dependent.
According to the IRS, parents may claim their child as a dependent until the child reaches the age of 19, but if the child attends college, then parents may claim that child until he or she reaches 24 years of age (if that child earns less than $3,700 annually). Children who are “permanently and totally disabled” or meet the qualifying relative test are an exception to these limits.
Qualifying for the Adoption Credit
Many families are blending now that same-sex marriage is legal and, therefore, many queer individuals are bringing their own children into their new families. A common practice is for new spouses to adopt the children their spouses bring into the family.
Adoptions generate expenses, but for both same-sex and opposite sex couples, the IRS does not view the adoption of a spouse’s child as qualifying adoption expenses for the Adoption Credit and Adoption Assistance Programs.
If you adopted a child in 2016 who is not your spouse’s child, the maximum qualifying adoption credit for 2016 is $13,460. If your tax credit exceeds your tax liability, you may carry the tax credit forward up to a maximum of five years. The IRS also allows you to exclude employer-provided adoption assistance from your earned income.
Adoptions eligible for the Adoption Credit and Adoption Assistance Programs are for individuals under age 18 or those “physically or incapable of self-care,” and are subject to income limitations, based on the Modified Adjusted Gross Income (MAGI) and dollar limitations. The income limitation for 2016 begins its phase-out starting at $201,920 and ends at $241,920.
MAGI is your AGI with certain deductions, such as student loan interest and IRA contributions, added back.
If retirement savings is a crisis for Americans in general, it’s a mega-crisis for the queer community specifically. Even though the queer community has disposable income nearing $1 trillion and the average incomes of both lesbian and gay couples exceed that of our straight peers, queer households tend to only have $6,000 more saved than our straight peers. There could be many reasons for this, but one includes a recent study that suggests 48% of the queer community identifies as “spenders,” while only 32% of the general population does. Therefore, it’s important for queer people to take advantage of all available retirement savings plans.
The IRS now requires qualified retirement plans to treat surviving spouses of same-sex marriages the same as opposite-sex marriages. IRAs, employer-sponsored plans, profit-sharing, and stock bonus plans must treat the participant’s spouse as the beneficiary, except when spouses consent to someone else being beneficiaries. The default beneficiary on all retirement accounts, however, only apply to legally married same-sex partners. It does not currently apply to domestic partners or couples in civil unions.
The tax and retirement security benefits of retirement plans should inspire the queer community to address our mega-crisis. Employer-sponsored account contributions are made with pre-tax dollars, which means contributions into these accounts are made before they’re taxed by the IRS. Withdrawals on employer-sponsored accounts are taxed at ordinary income tax rates, which are usually lower for qualified withdrawals made after retirement. In addition, traditional and Roth IRAs can offer various tax benefits depending in your situation.
Social Security Benefits
The Social Security Administration (SSA) recognizes the marriages of same-sex couples in determining Social Security benefit qualification, including Medicare and Supplemental Security Income (SSI). Unlike the IRS, the SSA is extending Social Security benefits to some couples in legal, non-marital relationships, such as domestic partnerships and civil unions. If you’re unsure if you qualify for your spouse’s Social Security benefits, contact the SSA directly.
The tax-filing considerations for same-sex spouses are new, but same-sex married couples should feel secure that we and our surviving spouses will be treated by the U.S. government the same as our straight peers. If you or your spouse still have questions, contact your accountant, your local IRS office or the SSA directly.
Regardless of your marital situation, managing your taxes is just the tip of the iceberg when it comes to reaching your long-term goals. Personal Capital’s free tools can help you develop your holistic financial strategy and reach those goals faster.
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.