Should We Get Married?

For Opposite-Sex and Same-Sex Couples

© Ben A. Tallman EA

Beginning on September 16, 2013, all legally married same-sex couples would be recognized by the IRS as married.  This means all legally married couples filing a tax return on or after that date “must” report themselves as married on their federal income tax return.

Now that I have your attention, let’s go back to the initial question “Should we get married?”  This is a topic that keeps running through my head during the early morning hours.  Those great ideas that become crystal-clear and precise while the rest of the household is asleep.  Now let’s pursue this idea.  Whether you are an opposite-sex or a same-sex couple, my comments should be equally relevant for both.

For the sake of our discussion, we want to break our answer into two parts or categories.  First, we want to look at the estate/non-tax benefits, and secondly, we’ll look at the tax issues.  Since I am not an attorney or CFP (Certified Financial Planner), I will limit my comments to general issues and refer you to the professionals for specific questions.  The most common estate/non-tax benefits include things like unlimited gifting, family health insurance coverage, the option of rolling-over a spousal IRA, combining your lifetime estate credits when the first spouse dies, and setting up marital trusts for a variety of purposes and reasons.  I should clarify that unlimited gifting does carry restrictions for foreign spouses ($145,000 in 2014).  Domestic partners are still limited to $14,000/year unless a gift tax return (Form 709) is filed.  Why...because domestic partnerships do not meet the legal requirements of marriage according to the Supreme Court (US vs. Windsor 699 F.3d 169) decided on June 26, 2013.  This being said, it is a good reason to make a copy of the marriage certificate for your records, since many domestic partners consider themselves to be married.  We don’t want you getting caught in the middle.  Let’s identify the states that have legalized same-sex marriage: “California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, [Washington,]” and the District of Columbia (http://www.cnn.com/2013/05/28/us/same-sex-marriage-fast-facts/).

If you have a marriage certificate from a same-sex couple issued by one of these states, you are good-to-go.  If you have not prepared a tax return for a same sex couple, I would suggest saving this article and others like it, to reference and add value to your interview process.  Even if a couple is not yet married, they often want your opinion on the advantages and disadvantages of getting married.

You’ll notice that I started with the non-tax benefits first.  There was a reason for this approach.  I have discovered that the tax disadvantages tend to over-shadow the tax advantages beginning in tax year 2013.  Many of your same-sex couples feel that they have been liberated and given permission to marry the person they love.  This may be true, but the age old advice given to opposite-sex couples still applies here.  Marriage is a decision that should not be entered into hastily or without wise counsel.

Now, the second part of our discussion is the tax-related advantages and disadvantages of getting married.  Most of the advantages are tied to households with children that stay below the $110k to $120k AGI level.  Most of the married benefits phase out after $160k.  Let’s not forget our senior citizen couples over 62 receiving Social Security.  The SSA worksheet begins taxing 50% of SS income when AGI reaches $32k and taxes up to 85% of the SS income when AGI hits $44k.  I actually had a couple get married in May of 2013 that fell into this Social Security Trap losing around $600 in refund money from the previous year.  They were very upset and were looking for someone to blame when I reminded them that they were married before IRS acquiesced to the Windsor Case in September.  I would warn you to avoid giving marriage advice to prospective same-sex couples over the phone.  This topic requires a “sit-down” consultation with your planning software for the upcoming tax year.  If you’re a Drake customer, it is already part of your program (just type in ‘PLAN’ and open a new file for the upcoming year).  Be sure to check the same-sex box on the MISC Screen and then use the MFS Split screen if your state does not recognize same sex marriages.  It will provide you with two Single State Returns (Thank you Drake). 

The potential for disappointment is back with the 2013 marriage penalties.  I know that’s a term you haven’t heard since 2009.  Do you remember the Bush Tax Cuts that went into effect in 2010 and then were extended for 2 additional years through 2012?  They eliminated the phase-outs on Itemized Deductions and Personal Exemptions from 2010 – 2012.  You guessed right, those phase-outs are now back to full-strength in 2013; and guess who takes the worst hit, married couples making over $300k.  While we are talking about 2013, let’s not forget about the new 3.8% net investment income tax for married couples making over $250k along with the .9% Additional Medicare Tax for combined earnings exceeding $250k for MFJ (cut these thresholds in-half for MFS).  I am seeing AMT (alternative minimum tax) kick-in for some couples after $160k and continues to run beyond $500k.  The original consensus was that AMT would cut off at a lower threshold, since the marginal tax rate would be higher in 2013.  Unfortunately, this assumption did not turn out to be true.  I realize that some of you don’t see clients in this income bracket, but that’s no excuse for being unprepared when one of them comes through your door.  If you have a non-custodial parent that is around the $400k bracket, they no longer benefit by deducting children on their tax return.  By explaining this point, your client may want to earn some “good-will” by offering to return the dependency exemptions to the custodial parent. 

Another item affecting our Social Security/Medicare recipients is the AGI threshold for married couples over $170k ($85k for Singles).  In case you didn’t know, Medicare Premiums cost more for “well-to-do” taxpayers.  This affects their premiums two years after the tax return you are now preparing.  In other words, the 2013 return will impact the 2015 Medicare Premiums for your client.  The premium goes up again at an AGI of $214k, $320k, and finally, at $428k, where the maximum Medicare Premium reaches $335.70/monthly or $4,028.40/annually. I hope you have found this segment interesting and encourage you to stay informed on all issues that have an impact on our clients.