In June 2013, the United States Supreme Court struck down the federal Defense of Marriage Act (DOMA) presenting same-sex married couples with a new set of financial issues. While same-sex couples can look forward to equality under federal tax laws, the U.S. Internal Revenue Service is still deciding how to make equality happen in agreement with each state. We are at the beginning of a new era, so it is time to prepare your practice for the unique same-sex financial issues that lie ahead.
The need is great. According to the 2013 Allianz Life Women, Money & Power Study, 80% of female same-sex couples said their unique situation creates a need to be financially aware and independent, yet 58% of them reported that that they currently do not work with a financial professional. On top of that, the majority of these women said their inadequate retirement savings could greatly affect their retirement. These couples are not only concerned about their financial future; they also need a financial professional to help.
With the changing legal landscape and increased appetite for financial support, take into account the evolving federal and state tax, retirement, and estate planning issues for same-sex couples.
Because of the inconsistencies with how each state approaches taxes, your job is more complex. The DOMA ruling split the country especially with respect to how same-sex couples will file their income taxes. For instance, same-sex married couples can, like any other married couple, file jointly on a federal level. However, if the state in which they reside doesn’t recognize same-sex marriage they may have to file as “single, or head of household” for both state and federal taxes. One potential advantage of filing this way is that they are able to manage two separate tax brackets, potentially utilizing two standard deductions and two personal exemptions, thus possibly reducing their overall income tax liability.
One strategy: leverage the federal income tax deductions that will most benefit same-sex partner clients by managing their deductions. Have one partner file using itemized deductions, while the other partner takes the standard deduction. They may be able to gift income-producing investment assets to the partner with the lower marginal income tax, thus reducing the couple’s overall tax liability. Another possibility is to assign federal tax deductions to one partner who could best utilize them based on income. To reduce their overall tax liability, these couples can also group the federal deductions for the partner that owns their home, using the mortgage interest deduction and the real estate tax deduction.