The Supreme Court decision last year that led to federal recognition of gay marriage means married same-sex couples can receive the same treatment and benefits as heterosexual couples. But equality sometimes comes with a price.
For the first time this year, married same-sex couples must file federal income taxes as married, either jointly or separately, and that means many will get hit with the so-called marriage penalty, the term for higher taxes that married couples often pay. The marriage penalty is the result of the combined incomes pushing filers into higher tax brackets and most often affects couples in which each partner earns about the same.
For example, a same-sex couple earning $150,000 a year, each with an income of about $75,000, would have a marginal tax rate of 25 percent if they filed as single but would be taxed at a 28 percent rate as married.
Lillian Gonzalez, owner of Gonzalez and Associates, a financial planning firm, said she expects most of her same-sex married clients to be hit by the marriage penalty since most form two-earner households, each with relatively high levels of income. “There’s going to be sticker shock,” she said.
In recent years, married same-sex couples had to take different approaches to income taxes, filing as married in states, such as Massachusetts, that recognized gay marriage, but as individuals for federal tax purposes, since the US government did not. But in June, in a case known as the United States v. Windsor, the Supreme Court struck down a provision of the Defense of Marriage Act in a 5-to-4 vote, leading to federal recognition of same-sex marriage.
Section 3 of the Defense of Marriage Act, or DOMA, defined marriage as between a man and woman. Section 2, which gives states control over the type of marriages they recognize as valid, remains law.
Financial planners say there remains quite a bit of confusion about filing requirements, post-Windsor. One same-sex client, Gonzalez said, asked to file as married, but single — an impossible combination.
“My focus right now with clients in same-sex relationships is reeducation,” she said. “The marriage penalty is somewhat new for people used to filing as single.”
Debra Neiman, a certified financial planner who has a written a book that covers financial planning issues for lesbian, gay, bisexual, and transgender Americans, said same-sex couples should use this period of changing rules to reassess the long-term goals of their finances and how changes in their tax status will affect those goals.
Neiman advises married same-sex couples to begin by reviewing their past returns for potential benefits related to filing as a married couple. Some couples may find savings on benefits such as shared health insurance that used to be taxed as income at the federal level, if the spouses filed as single.
Many financial planners are offering so-called DOMA reviews. TurboTax, a tax preparation software company, also offers an online tool for same-sex couples to perform a similar review.
In cases in which same-sex married couples will pay higher taxes, they may want to consider strategies to lower their liabilities, such as putting more money into tax-advantaged individual retirement accounts or 401(k)s.
In some cases, however, there is a so-called marriage bonus, in which filing as a married couple cuts the tax bill. This happens when one spouse earns the majority or all of the income in a household.
Couples benefiting from the marriage bonus may want to review and amend past returns to claim refunds. Under rules adopted by the IRS, same-sex marriage is recognized retroactively at the federal level. All couples are allowed to amend tax returns for the past three years, but it’s particularly useful for same-sex couples after the Windsor ruling.
The process is optional, and couples can cherry-pick the returns they amend.
“Let’s say 2011 would benefit them, but 2010 would not,” Neiman said. “Couples can pick and choose which years to file amended returns.”
After being together for 15 years, Gail Horowitz, 62, of Cambridge married her wife in 2006. For years they had to work their way through two different tax returns, filing state income taxes as a married couple and federal returns as single individuals.
Horowitz works as an attorney, and her wife, Susan Brand, 63, spends her time as a justice of the peace. Brand married many couples after DOMA was struck down in the Supreme Court ruling.
Since Horowitz is the main source of income and Brand’s income is not enough to push them into a higher tax bracket, they get a marriage bonus.
They filed their 2012 taxes on an extension after the Windsor decision and were pleasantly surprised to find they saved close to $1,500 as married filing jointly. A review of previous years’ filings found they would have saved money had they been able to file as a married couple.
“We can and will amend for 2011 and save a couple thousand dollars,” she said.
Stuart Armstrong is a financial planner who advises same-sex married couples. He is also in a same-sex marriage. He estimates that he and his partner, who works as an accounting manager, paid a marriage penalty of several thousand dollars on their 2012 returns, which they filed on an extension after the Windsor decision.
In some cases, Armstrong said, same-sex couples might prefer to stay unmarried for tax reasons.
But for him and his partner, it was important to make the commitment that marriage entails.
“It’s one of those be ‘careful what you wish for’ things,” he said. “But you have to take the bad with the good. People make very personal decisions about what’s right for them.”
Sean Lavery can be reached at firstname.lastname@example.org.