It’s been a year since the Supreme Court struck down part of the Defense of Marriage Act of 1996, a ruling that allows people who live in states that allow same-sex marriage to receive the same federal benefits as heterosexual couples. In that time, much has changed. Today, 19 states and the District of Columbia allow same-sex marriage, up from 11 states (and DC) a year ago. The IRS, in response to the DOMA ruling, now recognizes all same-sex marriages in the U.S. for federal tax purposes. And just last week the Obama Administration extended more benefits (including plans to let government workers across the country take leave from their jobs to care for their spouses) to same sex workers.
“It’s been a very exciting time,” says Kyle Young Senior Vice President – Investment Officer with Wells Fargo Advisors, who specializes in working with the LGBT clients. Wells Fargo recently surveyed nearly 900 LGBT investors – some married, some not – to see how they were feeling about their finances in the midst of all the changes. “Some of the information was encouraging,” Young said citing the 95% of respondents who could “fully identify” what the law was in their state. But other results were disconcerting in that they laid bare the fact that – like heterosexual couples – 83% of same sex couples (including 67% who are in legal same-sex marriages) don’t really understand what the changes in law mean to them. As a result, they’re likely not doing anything about it. Worse, many aren’t even talking about it; just 37% say new marriage laws have teed up financial conversations.
So, with the anniversary of the decision as background, a financial to-do list for same sex couples to ponder – and perhaps pursue.
Consider a spousal IRA. When you’re married, you are allowed to make an IRA contribution based on your spouse’s income – even if you don’t have an income yourself. For 2014, the contribution limits are $5500 for individuals under age 50 and $6500 for those 50 and over. This applies whether you contribute to a traditional or Roth IRA; couples who are married filing jointly can make a full contribution to a Roth as long as their modified adjusted gross income is less than $181,000*.
Revisit beneficiary designations. Beneficiary designations are more complicated than people think – but very important. On IRAs, for example, the beneficiary designation overrides what’s in your will. “if you enter into a marriage to go back and reevaluate your beneficiary forms.” If you want to name your new spouse as beneficiary, do it on the account itself. If, on the other hand, you have a workplace retirement account, like a 401(k), your spouse is entitled to inherit those assets – unless he or she disclaims them (that requires a form, too). If you have children or a previous partner that you want to inherit instead, you have to do the paperwork to make sure this happens.
You need a Social Security strategy. This is something heterosexual couples are just now coming to terms with; it applies to same sex couples in states that have legalized marriage as well. In general, if you’re married and one spouse earns significantly more than the other, you’ll want to maximize the higher earner’s Social Security as much as you can (which means delaying when that person takes it.) That way, if and when the higher earner passes away the surviving spouse can get 100% of the higher earner’s benefits rather than just his or her own.
Pay attention at open enrollment time. The rules for same sex spouses are kinder than they are to partners when it comes to health insurance. This is easiest explained by example. Before the Supreme Court ruling, if you wanted to put your partner on the health plan from your company it would typically be allowed – but the value of that benefit would be added to your “income” for IRS purposes and you would be taxed on it. Now, that’s no longer the case. Your company may charge you to have a spouse on the plan (that’s the company’s prerogative) but the playing field is now level. What this means is that if you decided to stay on your health plan (or your spouse on his or hers) because you didn’t want to be taxed on that benefit, you should take another look.
Finally, you may want to consider filing jointly (and amending past returns.) According to the Wells Fargo research 18% of same sex couples file married filing separately compared with 3% of the heterosexual married couples in the country. Why is that? “They are doing this to keep tax returns a little more normalized,” Young surmises. There’s also a “misunderstanding around the benefits of joint tax filing – a lack of confidence of what that means.” What it means is that in most cases by not filing jointly you’re leaving money on the table. Of the survey respondents, 28% found that filing jointly cost them more money, 52% found it cost them less – and that their federal tax liability dropped by an average $2,000. The answer to why has everything to do with the marriage penalty, which is complicated, but the shorthand is: The bigger the income disparity between the two spouses, the more you could potentially save by filing jointly. And if it looks like you’ll save this year, you have the ability to go back and amend your returns for the last three years (assuming you’ve been hitched that long) as well**.
*Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½.
**Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences.