When the Supreme Court overturned the Defense of Marriage Act in June, it tipped the first in a long line of dominoes that will affect the finances of gay couples for many years to come. The trouble is, even the most savvy financial advisors don’t (and can’t) know what it all means.
There are two reasons for this. First, new rulings based on the court action are still coming down from government agencies; and second, no one knows quite when the flurry of pronouncements will end.
“It’s overwhelming, and it’s going to continue to change as new interpretations on benefits will keep coming out,” says Carrie Schwab-Pomerantz, CFP, senior vice president of Charles Schwab & Co. and president of the non-profit Charles Schwab Foundation. “And when the IRS came back with their August 29 interpretation, it meant that same-sex couples are treated the same as married couples for federal taxes, regardless of where they live.”
Schwab-Pomerantz is talking about Revenue Ruling 2013-17, a 15-page document by IRS legal eagles Richard S. Goldstein and Matthew S. Cooper. While short by IRS standards, the ruling has monumental implications for gay couples. Basically, it states that if you have a legally recognized marriage as a gay couple, you are entitled to the same filing options as heterosexual married couples — even if the state you live in doesn’t recognize same-sex marriages.
“So if you are legally married in California and move to Georgia, you still get those benefits,” Schwab-Pomerantz says. “You can file jointly or separately, which some married couples do. And if you file jointly and there’s a benefit, you can amend your taxes going back three years.”
But Schwab-Pomerantz also stresses that the tax benefits here aren’t automatic; if you want them, you’ve got to take action.
So if you’re gay and married, talk to your accountant or financial advisor immediately: You could recover thousands of dollars. Start by pulling your federal tax returns for three years prior, and work the figures again to see if filing jointly produces a significant difference in the final outcome. If so, you’ll want to file a Form 1040X for each amended tax year.
That said, filing jointly doesn’t always mean your combined tax bill will go down. “In fact, it could actually go up if both partners earn a substantial and similar amount of money,” Schwab-Pomerantz says. “Make sure you run the numbers for both scenarios before making a decision.” (In case you’re wondering, the IRS will not come after you if your tax liability would prove greater by retroactively filing jointly.)
Finally, the IRS line is fairly clear: The new ruling does not apply to registered domestic partners, civil unions or other relationships recognized under state law but not considered a legal marriage. And going forward, gay married couples must indicate on their tax forms whether they are married filing jointly or married filing separately.
Less clear, though, is what happens with state tax returns. Of all the states that don’t recognize same-sex marriage, 28 impose a state income tax of some form, according to Accounting Today. How those states will move forward can only be forecast in the most general sense. Some might take their cues directly from the IRS ruling, while others might have to consider overhauling their tax laws to allow joint state returns. And that could represent a political hot potato in those states where gay marriage is strongly opposed.
Retirement accounts and Social Security
Currently, 13 states and the District of Columbia permit same-sex marriage, and it’s already clear that as one federal agency rules, another might go in a different direction. While it doesn’t affect the Money Under 30 age demographic so much, Social Security benefits aren’t following the IRS example. The benefits now extended to gay married couples only apply to those living in states where same-sex marriages are permitted.
Checking and tweaking your retirement packages, however, is of paramount importance, for gay couples and straight ones as well. Depending on when you got married, your retirement packages may specify a different beneficiary — a parent or a previous spouse, for example — and so Schwab-Pomerantz sees this as an ideal time to check those accounts.
“You absolutely need to make sure your beneficiary forms for IRA and 401(k) are up to date,” she says. “If it’s something you’ve forgotten to change, do it to protect your loved ones.” In addition, consider other connected needs, including making a will and signing an advance healthcare directive. “Speak with an attorney about your financial decisions before you’re really protected.”
No matter the current circumstance, the shifting nature of the financial-legal landscape for young gay married couples means staying attentive. Schwab-Pomerantz says proactive couples will reap the rewards first, especially if they alert their advisors about changes they’ve heard about through the media and other outlets.
“Do your homework because as up-to-date as a financial advisor can be, things can change the next day,” she says. “Talk to your friends in the same situation. Check in on websites such as irs.gov to stay up to date. We’re getting new interpretations all the time, so keep an eye out.”
Just as married couples join hands and hearts, they must combine their minds to make the commitment last. The changes in federal law stemming from the Supreme Court decision now give gay marrieds options they’ve never had before, yet that doesn’t necessarily make the task fiscal unity with your partner any easier. Here’s an invitation, then, to start those money conversations you’ve been delaying because of busy lives or anticipated friction.
True, it’s not as romantic as a dinner date or a beach getaway. But given the choice between “for richer” and “for poorer,” we’d much rather see you emerge on the former half of the equation.