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Federal Tax Implications For Same-Sex Spouses

This article discusses the tax implications of same-sex spouses following the Supreme Court Case U.S. v. Windsor. These couples are now treated as married for Federal tax purpose if the spouses were wed in a state that allows same-sex marriages and the couples are considered married for Federal tax purposes if they live in a state that does not accept same-sex marriages.

Same-sex spouses are now required to file their taxes with the filing status married; either together married filing a joint return or separately married filing a separate return. Married filing jointly usually yields a lesser tax liability than a married filing separate return. The requirements for filing as head of household also apply to same-sex spouses. One thing to be aware of is that if same-sex spouses live in a state that does not recognize same-sex marriages, the couple may need to file single returns for state tax purposes.

Same-sex spouses filing jointly have the same options to itemize deductions or to use a standard deduction. The amounts that can be taken as itemized deductions are reduced when income exceeds certain amounts.

For 2014, the applicable amount is $305,050 for married couples filing jointly. When the adjusted gross income (AGI) is greater than $305,050, the allowable itemized deductions are decreased by the smaller of:

· 3% of AGI over the applicable amount

· 80% of itemized deductions

As to tax credits, numerous are designed to progressively decrease or even become wiped out when income exceeds applicable levels for each credit. This may actually result in a higher tax bill. Examples of tax credits that are subject to income limitations are as follows:

  • adoption credit
  • earned income tax credit
  • education tax credits
  • child and dependent care credit
  • child tax credit

Moreover, a same-sex spouse is not allowed the benefit of the adoption credit for expenses connected to adopting their spouse’s children.

As to health benefits, an employee spouse can remove from gross income the amount of the premium paid by the employer for coverage of their same-sex spouse under an employer-provided health insurance plan. Until the Court’s decision in U.S. v. Windsor, when an employer’s plan provided insurance to the same-sex non-employee spouse, the employee spouse was taxed on the cost of the insurance coverage.

Employee spouses that receive their retirement and health insurance under an employer’s cafeteria plan are allowed to pay for their same-sex spouse’s health coverage with pre-tax dollars. Moreover, when a same-sex spouse employee’s health insurance ends due to termination, the COBRA provisions apply to the non-employee spouse and they can remain insured.

There also is a less satisfactory effect of the decision. The contribution limits for certain health savings or flexible spending accounts are less advantageous.

With regards to retirement plans, the rights of same-sex spouses are now identical. This applies even if the employer’s retirement plan is in a state where same-sex marriage marriages are not permitted. To wit, spousal acknowledgement is required in certain situations for example, changing the beneficiary to a non-spouse.

In the event of divorce, one spouse may have rights to the pension of the other spouse. This is usually done with a legal document, a Domestic Relations Order signed by a judge.

When a spouse dies, the survivor has more options to handle income that does a non-spouse beneficiary. Some estate and gift taxes benefits are now also available to same-sex spouses as follows.

  • Marital deduction the ability to transfer unlimited amounts to the other spouse, while both are alive.
  • Gift splitting, which means that gifts to others count like they were made half by each spouse.
  • The first spouse to die’s estate is entitled to a marital deduction for amounts given to the living spouse and unused exclusion is transferred to the surviving spouse.

The court decision takes effect September 16, 2013. For returns submitted previous to September 16, 2013, same-sex spouses have the option to amend their returns and file as married.

This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.

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