As the Treasury Department and the IRS recently announced a rule that legally married same-sex couples would be recognized for tax purposes, we had the chance to catch up with Jason McDonald over the phone. McDonald is an accredited Domestic Partnership Advisor with Wells Fargo Advisors, LLC in Austin. Jason is one of the top financial advisors in the country dealing with financial planning issues for the LGBT community.
Who is affected by this announcement?
This announcement affects legally married same-sex couples—even those who live in states such as Texas that don’t legally recognize their marriage. Specifically, these couples will be treated the same as married heterosexual couples for all federal income tax purposes, including joint filing and estate taxes.
In what ways will this ruling impact these married same-sex couples?
The list of how this affects same-sex married couples is vast and complicated but here are some of the main points: Couples can now file taxes as married. This option allows them to now have the ‘unlimited marital deduction, the ‘unlimited gift tax marital deduction’ and spousal benefits for IRAs. Also, company- provided spousal benefits will no longer be taxed. These are all positive benefits for same-sex married couples as a result of this recent ruling.
Does this mean that these folks will pay less federal income taxes than they did before the ruling?
Some couples will pay more federal income taxes while others will pay less. It really depends on the situation. Couples should seek the counsel of a certified public accountant now—so they can plan for the outcome and not be unpleasantly surprised next year.
What are the ‘Unlimited Marital Deduction’ and ‘Unlimited Gift Tax Marital Deduction’?
Married couples don’t have to pay estate taxes when one spouse dies and leaves their assets to the surviving spouse. The gift tax deduction allows one spouse to give an unlimited amount of money to the other spouse during their lifetime without being subject to gift taxes. Now recognized as married by the IRS, married same-sex couples can now take advantage of this.
How does the ruling impact company-provided spousal benefits?
Before this announcement, company-provided spousal benefits such as health insurance were taxable to an unmarried couple. Because same-sex married couples are now recognized by the IRS as married, they can now reap this benefit.
How will this impact IRAs and 401-Ks?
It will make an impact in a couple of ways. Just like the company-provided spousal benefits mentioned above, the marital status provides benefits that a couple didn’t have prior to this ruling. They may now be able to contribute to an IRA—even if one spouse didn’t have earned income through a spousal IRA contribution. It also means that when one spouse dies, the other will be able to transfer the assets into their own IRA instead of an inherited IRA, which will allow him/her the ability to take the money out over a longer period of time and spread the taxes out. This is why you need to talk to your financial advisor and make sure that your accounts are titled correctly and your beneficiary pages are updated.
What is the most important advice you can give a married same-sex couple regarding this ruling?
It’s simple: The rules have changed! It’s now imperative to set up a discussion with your financial planning team including your estate planning attorney, CPA and financial planner to learn how these changes will impact your financial future. I also recommend that you review your will and review the titling of your assets.