TaxImplications of Same-Sex Marriage
TaxImplications of Same-Sex Marriage
InAugust 2013, the Internal Revenue Service (IRS) declared that coupleswho are legally married and of the same sex could file tax returnsjointly. The decision, just like any other has several effects on thetaxes of the same-sex couples. Notably, many rules are still beingestablished and defined to accommodate the rulings (Cain,2014).Even though the Defense of Marriage Act (DOMA) has been in place, thefederal government and IRS has not been recognizing the same-sexmarriage hence rendering it impractical and making the couples missnumerous federal benefits that they may get if straight(Infanti, 2013).Even though the DOMA ruling is a pointer to benefits for theindividuals, seemingly there is still uncertainty concerning the IRSand recognition of the same-sex marriages (Smith& Stein, 2012).For a long time, IRS has depended on the country or state law toestablish the legality if same-sex marriage. This implied that thesame-sex couples that are married and leave in a given state thatdoes not recognize the same-sex marriage would not enjoy the benefitsthat are enjoyed by married couples. Notably, if the couples aremarried in a state that recognizes the same-sex marriage but residesin one where it is not, the marriage is still recognized by IRS.
Thedecision by the Supreme Court to make it legal for same-sex marriageto file returns in all the 50 states was monumental (Cain,2014).Undoubtedly, the decision had some real practical implications forboth the gay and lesbian couples. The implications are obvious asthis becomes the first time that these couples are using thedesignation of “married” to file returns. Some of the benefitsthat these couples are likely to enjoy include lower tax bill, theflexibility in remittance, which include filing separately orjointly. Even though there is good news, the individuals who are atthe extreme sides of the tax bill should be very worried given thatthey may have increased liability upon tying the knot. Whileexploring the declaration for same-sex couples to file returns, thispaper seeks to establish the tax implications that come with theruling.
Reductionin Tax Remitted
Fora very long time, partners who were of the same sex had to file taxreturns separately with IRS. While filing the returns, they wouldfill two separate forms (1040 forms) that had them designated assingle. Nonetheless, if they had a dependent one of them wouldqualify and have the tag of “head of household”(Cain, 2014).The 2013 ruling by IRS that gay and lesbian couples had the chance tosubmit joint return had many implications. First, given that gaymarriage is also legal nationwide, the total number of individualswho file their tax returns will be on the increase. An increase inthe number will automatically have an effect on the taxes. Eventhough there are likely to be obvious effects, for the new couples,the effect is likely to minimal. The amount that the couple willsubmit assuming they earn each $50,000 in taxable income would bemore or less same as the amount that they would remit if they submittheir joint returns (Cain,2014).
Theother implication is that the couples with a bigger disparity inwages would get a bonus. The reason for getting a bonus is that theycan average their earnings. Having this with the progressive tax codein place, the bigger income-earner is thus put into a lower taxbracket.
Notably,not every other individual benefit at tax time when married. In fact,at some instances, the married status of couples can lead to severalproblems and issues. At times, two high-income earners who get thesame amount of salaries can get lumped in a higher tax bracket. If itemerges that the total income of the couples is large enough, theyare likely to cause the “Medicare surtax” that was put in placein the year 2013. According to the surtax, married couples that filetheir returns jointly are to be charged 0.9% on the earnings that areabove $250,000.
Themarriage penalty does not only affect the affluent. The new coupleswho are on different ends of the income scale are likely to be alsopenalized by the IRS (Cain,2014).The penalty occurs because when their incomes are added up together,they are likely to be disqualified from the Earned Income Tax Credit.The tax credit is largely made to target the lower-income families.Moreover, if the couples are making almost the same amount of money,the penalty tends to occur.
Effecton Income Tax Credits
Legalizingof the same-sex marriage affects the amount of some of the taxcredits, especially the tax credits that benefit those who areplanning to adopt children(Infanti, 2013).The tax credits are usually structured in a manner that the amount ofcredit reduces when the income of individuals exceed certain definedlimit, at last putting it at zero(Alm, Leguizamon & Leguizamon, 2014).When the same-sex marriage is allowed, there will be instances wherecouples have combined income that would automatically result inphase-out range. This will put the income at a very high level thatthe taxpayers would be ineligible for the credit. The credit amountat times can also be reduced. Thus, there will be increased taxliability. Some of the credits that are likely to be affected byincome limitations is described as follows:
First,there is the Earned Income Tax Credit (EITC). The value of the earnedincome tax credit will reduce especially for the married couples whoare within the low-income model. Consequently, marriage penaltiesarise as the joint income of the married couples gets them to theEITC phase-out range or even make the couples of same-sex to beineligible for credit.
Effecton the Child and Dependent Care Credit
Thiscredit will be affected as the amount of the child, and dependentcare credit is often constrained to no more than the income of thespouse that earn the least. This then implies that if one spouseamong the same-sex couples has no income, the couple generally willnot get credit (Alm,Leguizamon & Leguizamon, 2014).
Effecton Child Tax Credit
Uponlegalizing of the same-sex marriages, the value of the credit phasesout given that income of the couples will rise above a given incomelevel (Alm,Leguizamon & Leguizamon, 2014).Different from the past, the phase-out level for married couples willchange, and it is expected to be less than twice the amount ofunmarried individuals (a status in which the individuals were treatedto before legalizing the marriage)(Smith & Stein, 2012).This then implies that two individuals who are married as applies tothe case of same-sex marriage would receive a smaller credit orbecome ineligible for the credit all the same.
Uponlegalizing of this marriage, the income levels at which the taxpayersare ineligible for the education tax credits will be twice as highcompared to the value when they were singles. To some extent, theonly reprieve that will be to the same-sex couples will be when theyhave evenly distributed income (Alm,Leguizamon & Leguizamon, 2014).Normally, marriages do not affect the overall credit amount amongcouples who have equally distributed incomes. For the couples whoseincomes are less evenly distributed, the value of their educationcredit will largely be dependent on their income level and if themarried couples incur education expenses for their adopted child. Thetrend is not very predictable as it would increase or decreasedepending on the particular situation in which the married couplesare in.
Thelegalization of the same-sex marriage has implications for thecouples that are looking forward to claiming the adoption tax credit.The adoption tax credit is not allowed when one is adopting a childof the other spouse (Alm,Leguizamon & Leguizamon, 2014).This then means that the legalization of the same marriage will havean effect on some partners who would otherwise claim adoption creditbut can no longer be able to do so.
Thedeclaration has provided the couple with the flexibility of filingthe returns jointly or separately. Just like other married couples,the same-sex couples have been allowed to submit their returns usingthe two options. In most of the scholarly work done previously, it isnoted that couples accrue many benefits when they file the returnsjointly. The benefits come in as the couples are in a position toaverage their incomes. If one individual makes a lot more than theother, then it gets to a point where there is a tax break.Additionally, completing the 1040 form jointly is one of the bestways through which married individuals can lower their taxable income(Cain,2014).A case in point is that if individuals submit their returnsseparately, they are ineligible to take the student loan interest.
Additionally,the couples who are planning to raise a child together get extraincentive to have their returns together. By having their returnslumped together, the couple can claim credit or even request to beexcluded from the expenses they incur while adopting a childtogether. Moreover, this is the only approach that allows thetaxpayer to get the Child and Dependent Care Tax Credit. As dictatedby the income of the couple’s, they are likely to claim a credit upto 35% depending on their qualifying expenditures.
Thereare also other credits that these couples enjoy, and they include theEarned Income Tax Credit, the American Opportunity, and LifetimeLearning Credits. The last two credits, for instance, help the taxpayers with reducing the cost of higher education. Additionally,having a joint filing of returns reduces the cost of filingsubstantially. If one depends on an accountant or professional tofile returns, they have to pay for the preparation of only one taxform rather than paying for two. This is ideally is cutting on thecost involved(Infanti, 2013).
Nonetheless,the declaration also still gives the couple a chance to file thereturns separately. A case in point is when one of the spouses wantsto deduct a considerable amount of out-of-pocket medical expenses.Normally, the IRS only allows one to exclude the healthcare coststhat exceed 10% of the adjusted gross income. If this individual isto qualify for the deduction, then it would only be possible andeasier with the income of an individual and not a couple. Any attemptto combine the earnings together for both the spouses would makesurpassing of the threshold very difficult. Additionally, whenindividuals file a joint return, they remain responsible for theliability of their spouse’s tax (Alm,Leguizamon & Leguizamon, 2014).This then means that the individuals could likely be held responsiblefor any missed payments, penalties, as well as reporting errors thatmight arise. This will happen regardless of the other party earningmore or most of his or her money that year.
Giventhat the declaration and the ruling came to effect within mid-year,most of the taxpayers had set up their employer state income taxwithholding. The setting up obviously was guided by the assumptionthat filing status would remain single for the entire tax year. Itis, therefore, advisable that the tax payers consult with differenttax advisors to help them comprehend the impacts that are likely tooccur when they file jointly. The effect is to be on the 2015 taxliability, and thus they have a choice to adjust state withholdingthrough submission of new withholding form to the employer.
Effecton Estate Tax
Asdefined and dictated by the law, a deceased spouse’s estate cantransfer all the assets to the surviving spouse without having theburden to incur any of the estate tax. Before the legalization,married same-sex couple was ineligible for this form of spousal taxexemption. The ineligibility was informed by Section 3 of the DOMA assame-sex marriages were not recognized by the federal government(Smith & Stein, 2012).This them implies that the couple could not get any form of federalbenefits. The exemption amount, in this case, is the total of theestate which when given to an heir becomes tax-free. This means thatif the heir is a spouse, the amount given for the exemption islimited. This means that for some couples, the recognition ofsame-sex marriage by the federal government can result in a decreasein the estate tax liability.
Apartfrom being recognized for unlimited spousal transfers, same-sexcouples are likely also to benefit from transfer of exemption amountsto any beneficiary that is not married(Cain, 2014).Different from the unlimited spousal exemption, there is a limit onthe amount of an estate, which can be given to non-spouse heirtax-free. As captured within the law, the estate tax is structured ina way that the first $5 million for every individual or the $10million for every recognized married couple of the estate andintervivos gifts are excluded from federal taxes when left tonon-spouse beneficiaries such as children or non-relatives. Forinstance, in 2015 when there is an adjustment for inflation, theexemption amount for each stands at $5.43 million. Given that anyunused amounts can be transferred between spouses, if a spouse leavesan estate worth $3.5 million upon death to a non-spouse beneficiary,the remaining $1.93 million of the deceased spouse’s exemptionamount can easily be transferred to the surviving spouse. This thenimplies that the amount that the surviving spouse gets would increasefrom $ 5.43 million to approximately $7.86 million. Before thelegalization of the marriage, the surviving same-sex spouse was onlyallowed to use his or her exemption amount to leave a tax-free amount($5.43 million). This then infers that the changes made allow thesurviving spouse of the same-sex marriage to bequeath a largerquantity of tax-free to beneficiary deemed to be non-spouse. Eventhough the federal recognition of same-sex marriages is likely to beof more benefit to the affluent married same-sex couples, there arechances that it may not affect most of the couples given that most ofthe estates that people own are often not subjected to tax. In 2013,it was estimated that 3,800 estates, which represent about 0.2% ofall deaths were subjected to estate tax. Given that, very few estatesare often subjected to the estate tax and that estate tax forms asmall portion of federal tax revenues, the federal budgetary effectof recognizing same-sex marriages for the estate tax is considerablysmall (Smith& Stein, 2012).
Withthe recognition of same-sex marriage, there is the effect on whethersome kinds of employee compensation of individuals within thesame-sex marriage are non-taxable. Some of these compensationsinclude contributions to dependent care flexible spending accounts(DCFSA) and the contributions of the employer for the insurance plansprovided by the employer (Alm,Leguizamon & Leguizamon, 2014).The current laws envision that taxpayers who have children cancontribute to a maximum of $5,000 to a DCFSA. From this, the totalamount of contributions that can be exempted for any tax return is$5,000 without considering the number of children or the number ofparents. This then means that married couple can put together up to$5,000 in a DFSA, the same maximum amount that an individual can havein the accounts. Any amount that exceeds $5,000 can then be includedin taxable income for the married couple.
Differentfrom the effect on DCFSAs, the married same-sex couple who have theemployer-sponsored health insurance plan can easily get the taxbenefits. Usually, when the employee decides to purchase healthinsurance provide by the employer, the employer has no obligation butto pay for its premium. The contribution of the employer to anindividual or family plan is never considered taxable income to theemployee. Before the same-sex marriages were recognized by thefederal government, the same-sex employees who bought anemployer-sponsored family health plan paid tax on the estimated valueof the employer’s contribution toward the premiums for a same-sexspouse(Infanti, 2013).On the other hand, married couples of opposite sex were never taxedon the portion of health insurance as the employer paid for thepremiums. Currently, the approximate value of the employer’scontribution to health insurance coverage for the same-sex employeesis non-taxable hence has a reduction in tax liability.
Effectson the Federal Tax Revenue
Owingto the recognition of the same-sex marriages, the federal taxrevenues are undoubtedly affected mainly through the changes in thefederal income tax. For the few married same-sex individuals whohave enough assets to be subjected to the estate tax, the potentialestate tax liability may largely be affected. Even though the changemay not affect the administration of federal income tax laws, thedecision stands a chance of affecting the population of same-sexcouples who chose to marry. Research works that quantify the incometax consequences of marriage for the opposite-sex couples can beinstrumental in understanding the potential revenue consequences ofthis recognition by the federal government. It is evident by the 2007tax code that half of the married couples have a marriage penalty of0.38 (Alm,Leguizamon & Leguizamon, 2014).A good number of the remaining couples were estimated to havemarriage tax bonuses. Averagely, increase in tax liability increasedby $450 for every couple. From the research that has been doneearlier, it can be affirmed that if same-sex couples have two incomeearners with the same amount of incomes, the couples are likely toface marriage tax penalties, especially if the combined income wereto make them get 15% above the tax bracket(Infanti, 2013).On one hand, it can also be noted that same-sex couples who marrystand less chance of having children before marriage compared toopposite-sex couples who marry. This means that the same-sex coupleswould receive fewer penalties as compared to the opposite sexcouples.
Thispaper has explored the tax implications of same-sex marriages afterthe August 2013, the Internal Revenue Service (IRS)(Infanti, 2013).Some of the implications include a reduction in tax remitted, theeffect on the income tax credits, high tax returns, the effect onnon-taxable employee compensation, and effect on federal tax revenue.For each, there seem to be negative and positive implications asdiscussed.
Alm,J., Leguizamon, J. S., & Leguizamon, S. (2014). Revisiting theIncome Tax Effects of Legalizing Same‐SexMarriages. Journalof Policy Analysis and Management, 33(2),263-289. Retrieved from <https://www.researchgate.net/profile/James_Alm/publication/259540984_Revisiting_the_Income_Tax_Effects_of_Legalizing_Same-Sex_Marriages/links/02e7e536e37762d0c5000000.pdf>[Accessed11 August, 2016].
Cain,P. A. (2014). Taxation of Same-Sex Couples After United States v.Windsor: Did the IRS Get It Right in Revenue Ruling 2013-17?.Retrieved from<http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1869&context=facpubs>[Accessed 11thAugust, 2016]
Infanti,A. C. (2013). Moonscape of Tax Equality: Windsor and beyond, The.Nw.UL Rev., 108,1115.
Smith,C., & Stein, E. (2012). Dealing with DOMA: FederalNon-Recognition Complicates State Income Taxation of Same-SexRelationships. Colum.J. Gender & L., 24,29.