Article Spotlight

 

In this series we analyze current financial articles and explain how the conclusions of the article relate to our investment strategy.

IRS Recognizes Same Sex Marriages

On August 29, the IRS ruled that legal same-sex marriages will be recognized for tax purposes.  If you are in a same-sex marriage or are thinking about becoming married, how does this ruling affect you?  Staying apprised of any tax changes can allow you to consider what these new laws mean for your specific situation.

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One of the biggest surprises resulting from this ruling is the fact that the IRS is implementing the standard from a “state of celebration” perspective, which means even if a same-sex couple moves out of the state they were married in, they can still file federal taxes as married filing jointly.  This is big news, as many believed the federal government would not accept these types of returns if the state they were living in did not recognize their marriage.

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Here are a few pieces of information to consider.

If you are already married:

  • You must file as married in 2013.
  • You may amend prior year returns back to 2010.
  • You should review your estate plan, particularly if you live in a state that does not recognize same-sex marriages.
  • You should review medical benefits and retirement plans.

Since married couples need to file jointly going forward, they may see an increase in their tax bill, from the so called “marriage penalty.”  Two partners making similar amounts usually pay more when filing jointly.  If there is one high-earning partner and one who earns much less, it is likely they will see a decrease in their tax bill.

We recommend creating mock tax returns for previous years to see if amending prior year returns results in a refund.  For some married couples, it could mean a large refund, but for others it could mean an increase in their tax liability.

Estate plans should be updated because same-sex spouses can now leave an unlimited amount of money to each other upon death without tax consequences.  If you live in a state that does not recognize same-sex marriage, it will be more important than ever to meet with a competent estate planning attorney to determine the best course of action, since states are handling estate taxes differently.

In the past, health insurance benefits were taxed to an employee who was part of a same-sex marriage if they put their spouse on the employer’s health plan.  This is no longer the case.  This may be another area that causes you to consider amending a past return, since you can get a refund for the taxes paid.  According to the IRS, employees should contact their employers about receiving a refund on payroll taxes.

The retirement plan safeguards that are in place for traditional marriages now are applied for same-sex spouses as well.  Spouses must make each other the beneficiary of a 401(k) or traditional pension.  The only way to get around this is if the would-be beneficiary spouse waives their right.

These are a few areas you should review with your investment, tax, and estate planning team as the IRS and other organizations give more guidance on how the law will be implemented.  If you are not currently married, this information should be understood and the consequences considered.  For more information on the specifics of the new marriage laws, we recommend speaking to your financial advisor or your CPA.

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About Lorne Enquist

Lorne is a Certified Public Accountant and holds a Masters of Professional Accounting in Taxation. As a Financial Advisor for Empirical, Lorne manages portfolios and shares his tax consulting experience for strategic tax planning for Empirical clients.

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