The Cost of Being Gay
A look at the financial realities of same-sex partnerships.
Chang W. Lee/The New York TimesA couple waiting to be married in Brooklyn on July 24.
Now that gay marriage is legal in New York, legally wed couples will be subject to new state tax rules, which affect everything from income and sales taxes to estate planning.
While New York recognized same-sex unions performed elsewhere before the state started issuing marriage licenses of its own last month, that recognition did not extend to tax matters. Now it does.
The new tax rules, in fact, apply to all legally married gay couples who are living in New York, even if they were married outside the state.
Of course, since the federal government does not recognize same-sex unions, that equal recognition still does not apply for federal tax purposes. So couples will need to maintain a double identity of sorts: one for the state, another for the federal government.
So how will couples’ tax lives change? And what do they need to do differently? The state tax department recently issued guidance for these couples, outlining some of their rights and responsibilities. The changes went into effect on July 24 as part of the broader marriage equality law.
Income Taxes Married couples must now file their state income tax returns using a married filing status, even though they must continue to file as either singles or heads of households on their federal returns.
As a result, same-sex couples are likely to spend more time — and money, if they hire an accountant. That is because they are going to need to fill out their federal return twice: They must file their official return as individuals, but they must also complete a dummy federal return as if they were married so that they can compute their New York taxes.
Couples who were married as of Dec. 31, 2011, will be considered married for the entire year, which means they must file their 2011 returns as married. That said, the law is not retroactive, so you can’t amend a prior year’s return, or file a 2010 return that is on extension, using a married filing status (even if you were married at the time).
Going forward, gay couples may also want to consider changing the amount of state tax that is withheld from their paychecks in light of their new filing status. To make any changes to withholding, members of same-sex couples can file a new state withholding allowance form (known as IT-2104) with their employers.
But they should run the numbers before they do. Married couples who earn more than $75,000 each and plan on filing a joint return may want to continue to keep their “single” withholding so that they don’t end up owing the state money in April because of the marriage penalty, said Tina Salandra, a New York accountant with expertise in same-sex couples’ issues. The penalty causes married couples to owe more money than if they filed their returns separately.
There is a loophole that may allow couples to avoid being pushed into the higher bracket, however. Same-sex spouses can file their state tax returns using “married filing separately” status, which uses the same tax rates as if they were single, Ms. Salandra said.
“Married heterosexuals cannot usually file as separate unless they also file this way on their federal tax return,” she said, noting that federal tax brackets for married filing separately status is the costliest way to file. “Consequently, until the federal government recognizes same-sex marriage, there may be a tax advantage in New York State for married same-sex taxpayers.”
The same advantage exists for same-sex couples in New Jersey and Connecticut, she added.
Health Insurance Taxes Workers with same-sex spouses are taxed on the value of their partner’s health benefits because the federal government does not recognize their unions. But legally wed gay couples will no longer owe that tax at the state level, so they should be sure to provide proof of their marriage to their employers so that the companies can stop withholding those taxes and recognize the new spousal status.
Sales Tax Certain family members don’t have to pay sales and use taxes if they sell a car to a relative. So starting on July 24, the sale of motor vehicles between same-sex spouses, or between a same-sex spouse and his or her spouse’s child, are exempt from sales and use taxes, according to the state tax department’s Web site.
To claim this exemption, complete this form and submit it to the New York State Department of Motor Vehicles when registering the vehicle.
Estate Taxes Opposite-sex married couples can transfer an unlimited amount of assets to each other during life and after death, all without tax consequences. Now, married same-sex couples will gain some of those benefits, at least at the state level.
Under the new state law, surviving spouses can inherit an unlimited amount of assets without having to pay state estate taxes, which are typically owed on assets that exceed $1 million (This applies to same-sex spouses who died on or after July 24, whether or not a federal estate tax return is filed.)
Of course, these rules still don’t apply at the federal level. So if an estate exceeds the $5 million federal threshold, a surviving same-sex spouse may owe federal estate taxes. And if the couple gives each other large gifts, there may be federal gift tax implications.
But the new state tax law provides a big benefit. When calculating the size of an estate that belongs to a same-sex spouse, the survivor will now be able to use the same deductions and valuations as if their marriage were recognized for federal purposes, which can help reduce the size of the estate. Even though the spouse is entitled to inherit an unlimited amount of assets free of state estate taxes, a smaller estate can help them — and any additional heirs — in other ways.
For instance, if the couple had property that they held jointly, only half of the property’s value will be included in the estate. If that reduces the size of the estate below the $1 million threshold, that means the surviving spouse will not have to file an estate tax return. “If the gross estate is under $1 million, then there’s no tax and also no filing — a considerable savings of time, effort and attorney/accounting fees,” said Ron Meyers, an estate planning lawyer in New York.
It can also help in situations in which the deceased person wanted to leave property to someone other than a spouse. Let’s say Adam and John jointly own a $1 million home. Only half of that will be included in the surviving spouse’s estate, reducing the overall size of the estate. That could lower the amount of assets that are subject to taxes, as well as the overall tax rate. So any gifts passed on to a niece, for instance, are likely to be subject to less tax.
In addition, when computing the size of their estate for state tax purposes, same-sex spouses are also entitled to engage in what is known as “gift splitting,” something that married couples are allowed to do on their federal estate tax returns.
The big advantage of gift splitting for opposite-sex married couples is that it allows them to give away twice the amount of money that they could give as individuals — all while avoiding federal gift tax implications. Normally, individuals are allowed to give up to $13,000 a year to as many people as they want. As married couples, they could give away $26,000 to each person. (New York State does not have a gift tax.)
Even though the federal law does not recognize same-sex marriage, surviving spouses will be able to apply those rules when calculating the size of their estates for state purposes. This could help shrink the estate’s size, and perhaps any taxes owed on gifts left to heirs other than the spouse.
First, some background: individuals are currently allowed to give away up to $5 million while they are alive. Any gifts that exceed the $13,000 per person exemption eat into that amount. And any portion of the lifetime exemption that is used is subtracted from your estate tax exemption (now $5 million) after you die.
So here’s how gift-splitting will help same-sex spouses: If Adam gives his nephew $23,000, that means that $10,000 of that gift will eat into his $1 million lifetime exemption. If Adam is married to Steve, that means he can split half of this gift to his spouse, using only $5,000 of his lifetime exemption.
“That works nicely if Adam is wealthier, because it uses up less of his exemption, while using up more of Steve’s, which would otherwise be an unused resource,” Mr. Meyers added.
Now that their marriages are recognized at the state level, same-sex couples with substantial assets will require less complex estate plans. But that does not mean they can ignore these matters altogether.
“Complex analysis is still necessary, due to the disjunction of New York law with federal and other states’ laws,” he added. “But the marital exemption is a greater tax break, achieved by the mere act of marriage, more than any of the more complex structures that would have been necessary before.”
How will the new tax rules affect your financial life?
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