Marriage Penalty: same-sex couples still ahead at tax time
There are many good reasons for us gay folks to fight for the right to marry — to be able to visit your loved one in a hospital, to collect Social Security if your partner dies, and just because we want to (gosh darnit!). But if the Federal government ever gets around to recognizing our relationships, gay couples with two solid incomes will end up paying a lot for the privilege.
Like much of the American way of life, the tax code was set up assuming that a family = two adults + 1.5 children + a house in the suburbs with a white picket fence. It further assumes that one of those adults stays home while the other goes out to bring home the bacon.
Fast forward 150 years, and only about half of Americans fit this scenario. Today, a couple of professionals each with $120,000 in taxable income would pay a total of $55,158 if they file as two singles. The same couple would owe $57,989 if they file as a married couple — a “marriage penalty” of $2831. It also bumps them into the next tax bracket, changing their marginal rate from 28% to 33%.
Let’s say the couple has a newborn infant. If they invest the tax difference, $2831, every year for 18 years at 5%, they will have $79,642 — a tidy sum to help pay for college expenses.
So, if you live in a state where you can’t file as a couple, and you fall into this scenario, enjoy your “gay savings.” Isn’t it nice that Uncle Sam charges us less in tax? You might consider donating some of this hidden windfall to HRC or Lambda Legal as a thank you for all the work they do on our behalf.
Of course, not all of us fall into the “two professional incomes” category. For families where one spouse stays home to care for kin and hearth or where one spouse has a particularly low income, they would benefit by being able to count their spouse as a dependent.
Tax rates can be found on p. 80 of the IRS 1040 instructions.
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Helen Maynard is the founder and principal of Affine Financial Services, helping individuals with taxes and financial planning.
Photo credit: stock.xchng.
Looking at the same information, you and I come to very different conclusions. With unemployment nearing 10%, I suspect that more and more same-sex couples are single income families these days. And as more states offer marriage or domestic partnerships, allowing more couples to share insurance and other benefits, more couples might be looking at having one partner stay home.
To me, it seems like we’re likely to have more single income same-sex families than ever before. And those families (especially the ones that didn’t intend to be single income families!) are the ones paying a real penalty. Heterosexual couples can decide if they want to marry. I doubt very many choose to remain unmarried for the tax benefits, but the option is available. Same-sex couples don’t have the same choice.
I live in Massachusetts, and am married. My husband works; I do not. Here in Massachusetts, same-sex couples have to fill out their federal taxes twice — once as married, so we can use the federal numbers to fill out the state return, and once as single people, so we can actually submit our returns.
It’s not just the filing status that hurts our taxes, either. I’m on my husband’s insurance, so his company has to report my health insurance to the federal government as additional income.
All told, the difference between being treated as a married couple costs us about 5% of our annual household budget.
Hi Mark,
Thanks for the comment. I completely agree that not all LGBT families save money on their taxes, and the last part of my blog did address that issue. There are many opportunities that we lose at the Federal level, since our marriages are not recognized.
I also live in Massachusetts, am married, and my family also has one primary income. We took advantage of that fact this year to make some financial moves that saved us a bundle in tax. I’ll explain some options in a post soon.
I think that we Massachusetts folks have the opportunity to share our tips to the rest of the nation, as more states allow us to handle our finances as married couples. So please join with me in sharing your experiences to the rest of the Queercents community.
Best regards,
Helen.
Another unfortunate side affect of the tax situation for non-married couples has frustrated me this year as well. The tax credit for first time home buyers is a nice incentive and it happened at the right time for us as we planned to buy this year. Unfortunately, I realized that on my own, my income was too high to qualify for the credit. My partner, a full time student with a part time job doesn’t make enough annually to even try to purchase the house alone and together we are well under the “married filing jointly” income threshold. But of course, we can’t file that way. So, not only can I not claim her on my taxes as a dependent but I also can’t take the home buyers credit. Boo.
Dear Amy:
Boo, indeed.
They do allow a partial credit if your sweetie student paid either some of the down payment or is paying part of the monthly mortgage. It would at least reduce her tax. IRS Form 5405 says:
“Line 1. If two or more unmarried individuals buy a main
home, they can allocate the credit among the individual
owners using any reasonable method. The total amount
allocated cannot exceed the smaller of $7,500 ($8,000 if
you purchased your home in 2009) or 10% of the
purchase price. See Purchase price on page 3.
Part II Credit
Note. A reasonable method is any method that does not
allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit.”
Also, congratulations on your new home. May you have many happy years in it together.
Helen.
I got to you from Mombian, which I love, and I’ll be reading more. Glad to have you as a resource! What’s the average income of US families, GLBT included? A lot less than $240,000 I think, isn’t it? My partner and I, also married in Mass, both have professional jobs, one government and one non-profit, and our combined full-time salaries are WELL under that. If we could file as married federally we would save a bundle.
Helen, I hadn’t ever really considered this “tax penalty” for heterosexual couples. You’d think the pro-nuclear family groups would get on top of that.
Amy:
$240,000 is a lotta lettuce, but the tax inequalities exist at lower levels too. For examples, if each partner earned $70k, they would fall in the 25% tax bracket as singles, but the 28% bracket as a $140k couple. The savings come when each partner earns about the same amount; the gay penalty occurs when one partner earns significantly more (and can’t claim the other as a dependent).
The example that I chose was based upon a question from the (straight) guy in the next cubicle at work, and it approximated his personal situation. I was trying to convince him to divorce his wife for the tax savings — that way he could put his kid through college. It gets back to the question of “why should the Federal government get to pass judgment on whether or not we can marry.” But then he decided that while he could probably rationalize it to his wife, his in laws would have a fit. And I enjoyed my little muckraking moment.
I’ve been a part of both scenarios. Two years ago I cashed in some stock, so my income was significantly higher than my spouse’s income. We would have made out big time if we could have filed the federal as a married couple. But this year – when our income was about the same again – we were better off not filing as married.
The more painful part of all this is that we file our state as married (Massachusetts,) but must do our federal as singles. Lots of paper work!
I admit, I get hit with AMT every year, but my partner does not. That leaves us some flexibility at tax time as long as we are consistent in who claims what. However, consider that as we age, the advantage we see now is grossly outweighed. As we look at life insurance needs, if one of us passes away, the other has to pay tax on the 401k accounts left. That’s a tax bite at ordinary income amount that has to be replaced through life insurance. Additionally, no survivorship rights on Social Security, so plan for that gap as well. My partner also loses my AT&T pension rights. The pain towards the later parts of our lives are far greater than the small 2-3% we gain filing separately.
Colleen and Karen:
I wish the Federal Government would recognize our relationships and let us choose how to file our taxes — as two singles or as a married couple. That would make it fair to everyone.
So I agree with you in spirit, but I have a few comments on your note:
1) You can pass on your 401(k) assets to whomever you wish through a beneficiary form, and there won’t be any Federal estate tax unless your total estate is worth more than $3,500,000. State estate tax varies by state, but the header of the email suggests you are in TX, which has no estate tax, so I don’t see the need for additional life insurance. Ditto for your house, if you have one, as long as it is titled properly to have your half pass to her (and vice versus). If you mean the income tax that would be payable on the 401(k), I agree, but you would have had to pay that anyways (albeit in retirement and on a different schedule).
2) Are you sure she would lose the AT&T pension? I used to work for them (at Bell Labs) and they had really good domestic partner benefits. I’m guessing that you’ve checked, but I’m surprised that you can’t leave it to a non-spouse, or to a trust that you could create. When I left, I received my vested portion as a lump-sum.
3) No Social Security survivorship rights. Yup. No arguing that.
I still think the savings aren’t chicken feed. 2-3% of your household income is probably a good fraction of what you spend on a vacation or into your kid’s education fund (if you have children).
My partner and I are married in Massachusetts (where we live), and we would like to be married in the eyes of Uncle Sam, too. I’m just saying we should recognize the advantages, few that they may be, to our current situation.