Married, Single or Registered Domestic Partner (RDP)...
June 26, 2013 will remain an important date in human rights history.
On that date the United States Supreme Court found that Section 3 of DOMA is unconstitutional and violates equal rights of same-sex married couples.
This was a big victory for the LGBT community. Finally, the day has come when same-sex married couples have the same rights/responsibilities as do heterosexual couples, at least for states like CA.
Setting aside the sentimental joy of marriage, however, same-sex couples should be aware of financial/tax impacts marriage might bring. It’s best to consult with a tax-professional before marriage to avoid any surprises at tax time.
The one question we get asked more often than anything:
“Is it more beneficial from a tax stand point to get married?”
The answer is, as always, “it depends...”
Penalized for getting married…especially for “power-couples”
Contrary to common belief that married status might lower your taxes, the opposite is true for many younger couples, especially when both parties are working and are medium to high earners. This is caused by a so-called “marriage penalty” – a phenomenon that some heterosexual married couples have been experiencing for ages.
Wikipedia explains the marriage penalty as the higher taxes required from some married couples that would not be required by two otherwise identical single people with exactly the same income. The mechanics of that are simple: the combined income of two high earners puts them in a higher tax bracket.
Some Cons... but many Pros…
Especially where one party earns relatively little
The one big advantage of Married Filing Jointly status is that if one spouse is working and the other is a homemaker or stay-at-home parent – the income shifting from working spouse to non-working spouse will in most cases result in lower taxes. However, since CA is a community property state, same-sex couples residing and working in CA can achieve the same result (and in many cases even better tax savings) by registering as a domestic partners. For RDPs, two partners will have to split community income (including any wages) between two returns and file each as a single for Federal purposes (which often will create higher combined standard deduction, lower marginal tax rate and some other tax savings that are beyond the scope of this discussion)
Estate and Gift Tax Issues
Another important tax benefit available to married couples that otherwise is not available to RDPs or two single individuals is the unlimited gifts provision to transfer assets between married persons. This includes not only the transfer of assets between two spouses during their life together but also a transfer of assets to the survivor spouse when one spouse dies (estate tax benefit). The estate tax benefit that is available to married couples (and for many years was not available to same-sex married couples due to DOMA) gave rise to the United States vs. Windsor case that became the landmark case for striking down the DOMA.
Note that the estate/gift tax benefits available to married couples are not available to RDPs, but it is not impossible for RDPs to achieve a certain amount of gift/estate tax equivalency through careful planning and wills/trusts utilization.
Overall, for same-sex couples in California, there are significant planning opportunities and pitfalls. When deciding how to form your union (married, RDPs or neither) it is important to consult with your tax professional regarding your specific situation.
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— Selwyn Gerber CPA