January 27, 2023

Bucks: How Gay Marriage Will Alter Couples’ Finances

What if You're Gay - Your Money - Bucks Blog - NYTimes.com

Couples may marry for love, but the partnership is also an economic one. And now that New York has become the sixth state to perform same-sex marriage, couples who tie the knot here will gain a variety of financial benefits and legal rights.

Some of the changes will be significant. While New York had already recognized same-sex marriages performed elsewhere, that recognition didn’t extend to state income taxes. Now, couples who marry and live in New York will be able to file their state tax returns jointly. Wealthier couples may end up paying more in taxes, but families with lower incomes may owe less.

Couples who decide to marry will also be first in line to inherit their spouses’ assets, even in the absence of a will. They’ll gain an array of smaller benefits as well, down to the ability to transfer a lobstering license.

“There are hundreds of different protections and benefits under New York law,” said Susan Sommer, director of constitutional litigation at Lambda Legal, a legal advocacy organization for the gay community.

Of course, there’s still a long list of federal benefits that will remain out of reach. Since the federal Defense of Marriage Act — which defines marriage as between a man and a woman — is still being enforced, gay couples in New York will still need to file separate federal tax returns. They will not be eligible for Social Security spousal or survivor benefits. And they will continue to owe extra income taxes on their spouse’s health insurance benefits — a cost that opposite-sex married couples don’t have to pay.

So how will life change for same-sex couples who decide to marry? Here are some of the highlights (some of these items already apply to New Yorkers who live here but were married out of state):

Income Taxes Married couples will be able to file their state tax returns jointly, though they will still need to file separate federal tax returns (either as single or head of household). Some couples who jointly earn less than $65,000 may end up paying less in state income taxes than if they filed individual tax returns because they will get what known as a marriage bonus. But some couples with higher income may be end up in a higher tax bracket by filing jointly. In other words, they would owe less if they remained single and filed separate returns, said Tina Salandra, a New York accountant with expertise in planning for same-sex couples.

Filing joint state returns is also likely to complicate matters for federal tax purposes, and it’s likely to cost the couple more in tax preparation fees (or time, if they fill out their own returns).

Here’s why:  Even though the couple must file separate federal tax returns (as single or head of household), they must still prepare a dummy federal tax return using a married filing status, so that they can use that data for filing their joint state return.

Otherwise, nothing changes on the federal tax front since they must file separately. (Generally speaking, couples with similar incomes or really high incomes save money by filing individual tax returns, Adding their income together often pushes them into a higher tax bracket. But couples with a stay-at-home parent or a couple with disparate incomes would typically pay less if they could file joint returns).

Estate and Gift Taxes Individuals with large estates will benefit because New York State allows spouses to transfer an unlimited amount of assets at their death. Everyone else must pay state estate taxes on estates that exceed $1 million.

But same-sex married couples will continue to be subject to federal gift taxes and estate taxes, unlike their opposite-sex counterparts.

Health Insurance People who work for companies that offer domestic partner insurance must pay income taxes on the value of their partner’s benefits, unless they are considered a dependent. Heterosexual married couples aren’t subject to the tax since the federal government recognizes them as an economic unit. Now that same-sex couples have the ability to marry in New York, they won’t owe those taxes at the state level, but they will still owe the taxes at the federal level, experts said.

Inheritance Rights It’s always wise to have a basic will outlining your wishes. If you don’t, your estate will be divided according to New York State law, which puts spouses first in line of inheritance. But if the deceased spouse has children, the spouse will get $50,000 plus one half of the estate, while the children share the rest. Surviving spouses can also determine what they want to do with their spouse’s remains.

State Employee Benefits The spouses of gay people who work for the state in some capacity — whether they’re governmental office workers or professors at the State University of New York — will be able to treat their spouses as just that. That means they’ll be eligible for health insurance, pension survivor benefits and any other benefits normally extended to spouses.

Parentage When a married lesbian gives birth to a child in New York,  the woman who did not give birth, but who is recognized as a parent, will be automatically put on the child’s birth certificate (even if she doesn’t  have biological ties to the child or hasn’t adopted the child). Even so, it may be wise to adopt.

“Having a birth certificate reflect the child’s parentage from the start is a big help for the family,” Ms. Sommer said. For instance, it allows the nonbiological parent to easily put the child on her health insurance, as well as make health care decisions for the child. “But an adoption is the best way to secure the child’s legal relationship to both of the child’s parents not just in New York, but everywhere.”

For two married men, however, the situation remains a bit more complicated. If two men are using a surrogate to carry their child, only the biological father can be automatically listed on the birth certificate. Because of New York State law, the surrogate must first relinquish her rights to the child, at which point the nonbiological father can adopt the child.

Other Rights If a person dies from a work-related injury or illness, their spouse may be entitled to worker’s compensation benefits. Spouses also have the ability to bring wrongful death claims on behalf of their significant other.

Potential future benefits If the Defense of Marriage Act, known as DOMA, is ultimately struck down, being able to marry in New York will open the door to the many federal benefits that come with marriage.

“New York opens the door for couples who get married to be in a position to get those federal rights and protections when the day comes, in the not distant future, that DOMA falls,” Ms. Sommer said. “Marriage in New York brings the upside of access to these federal protections.”

Of course, for many couples, just being able to describe their status with one easy word — marriage — is the biggest benefit of all. “The big gain here is going to be in the security, clarity and dignity that comes with being able to say, ‘We are married,’ said Evan Wolfson, president of Freedom to Marry, an advocacy group in New York. “This is above love and commitment, more than the legal and economic matters.”

What other benefits, obligations or costs might married same-sex couples encounter in New York?

Article source: http://feeds.nytimes.com/click.phdo?i=fcdf747a8d640d88d52fcc8c9b02dafa

Bucks: A Trickier Tax Season for Some Gays

What if You're Gay - Your Money - Bucks Blog - NYTimes.com

Tax season often delivers more than the usual set of headaches for same-sex couples. But it’s about to get incredibly more complicated for couples living in California, Nevada and Washington. There is an upside, though. Many of them will save thousands of dollars in federal income taxes.

Here’s what’s happening: Same-sex couples who are living in the three states that have both community property laws and recognize registered domestic partnerships or same-sex marriage must now follow their state’s community property laws on their federal tax returns (if they’re officially partnered). In community property states, generally all income and property acquired during a partnership or marriage is treated as equally owned by both individuals.

So that means couples must add up their combined “community income,” split it in half, and each report their half on their own federal returns (as well as any separate income). Before the Internal Revenue Service changed its interpretation of the law last May, each partner simply reported his or her own income on the federal tax return.

The new rule is likely to generate nice refunds for couples who have one high earner and a lower earner, and particularly couples in which one partner is a stay-at-home parent with no income. In those instances, splitting their income means they’ll fall into a lower tax bracket. In fact, most couples will benefit or break even, said Karen Stogdill, an enrolled agent and president of KKS Tax Associates in San Francisco, who has many same-sex couples as clients.

“I call this the income tax gravy train,” Ms. Stogdill said. “It couldn’t really get better for the community as a whole.”

Consider a couple where one partner earns about $82,000 and the other partner stays at home. Under community property rules, both individuals would report income of $41,000 on their federal returns. Splitting their income would generate about $4,800 in tax savings on their federal returns because that qualifies them for a lower tax bracket, Ms. Stogdill said.

Heterosexual married couples in these states usually file joint returns, which doesn’t provide an opportunity to split their income and qualify for a lower tax bracket, Ms. Stogdill added. In this instance, the I.R.S. is simply recognizing gay couples’ community property rights, not their union.

But the new rules won’t help all gay families — couples who earn similar incomes will generally owe the same taxes and some people who now qualify for tax credits may end up paying more.

Regardless of how it affects you, figuring out the new system will be a challenge for the very same reason many couples will benefit: same-sex couples can’t file their returns jointly, which means couples with combined finances will need to untangle what is deemed community property and what is separate.

Even Nina E. Olson, the national tax advocate who acts as an ombudsman for the I.R.S., has called the situation “ridiculously complex.”

“Taxpayers in this position must either be extremely knowledgeable about taxes or pay high fees to tax preparation experts to jump through the right hoops,” she said. “These rules place an unreasonable burden on taxpayers, and they need to be fixed.”

Indeed, getting professional help can be costly.  Ms. Stogdill, for instance, charges each partner $900 per return, given the increased time it takes to complete their tax forms, compared with $600 for a married couple who files jointly.

Below, we compiled some tips for same-sex couples in the three affected states:

Figure out the state of your union. You will be subject to the new rules if you have a registered domestic partnership in Washington, Nevada or California or if you were legally married in California (during the brief window when you could marry there) and live there, or if you were legally married somewhere else and live in California.

Figure out what’s community property. Same-sex couples already must follow community property rules at the state level, but that’s easier since they can file jointly and don’t have to differentiate between what’s community and what’s separate.  But on their federal returns — where they must file as single or head of household — they will need to determine which is community property and which is separate. That is difficult because there isn’t a special form to do so. Instead, couples will have to attach a spreadsheet to their return, using the guidance offered in I.R.S. Publication 555, which provides information on what qualifies as community property and income. Still, experts said there were many open questions on what qualified.

Generally speaking, community property and income need to have been acquired or earned during your partnership. So any interest income earned from, say, a certificate of deposit bought with community income must be split in half. The same logic applies to deductions (if the mortgage is paid with community income, then both partners must split the mortgage interest deduction). To do all of this, couples will need to go back and trace what’s been acquired with community money — dating back to your date of registration or marriage, whatever is earlier — and what hasn’t.

“The tricky part will be figuring out what is your separate property from before and what was added after,” Deb Kinney, an estate planning attorney in San Francisco, said on a webcast explaining the issue. For people who were recently married, she suggests taking snapshots of all accounts and then perhaps starting a separate account for community property, to keep your records clean. Then you’ll know that all interest income from those accounts are community income and must be split.

Couples with valid prenuptial agreements, however, should follow the rules outlined in that document. It might say that a certain percentage of wages will remain separate, for instance.

Are you self-employed? Self-employed people are going to run into some unique challenges. Since these individuals typically prepay their estimated tax each quarter, all of the tax payments will be made by one partner, yet the other partner will be required to report half of the income. The result? One partner will end up with a big refund, while the other partner will have a giant tax bill, Ms. Stogdill said. “We really need the I.R.S. to view these tax returns as related,” she added. “That is creating all sorts of correspondence with the I.R.S. and it’s generating penalty letters that don’t make any sense.”

She recommends writing back to the I.R.S. explaining your circumstances. And in many cases, it may help to get an expert’s help.

Consider filing an extension. If you think it’s going to take more time to file your taxes correctly, experts said couples should not be afraid to file an extension using I.R.S. Form 4868, which will give them an additional six months to file.

“If we had the option of filing jointly, it would be so much easier to comply with the federal income tax law,” Ms. Stogdill said. “ On the other hand, many of us are getting a much better deal now.”

Consider amending previous returns. Couples have the option of amending previous tax returns, which makes sense for families who expect refunds. In California, couples can amend their returns as far back as 2007, though you must generally file the amended return within three years of your original filing date. Nevada residents received community property rights in October 2009, so taxpayers can amend their 2009 returns. Washington State residents received these rights in June 2008, so returns can be amended for 2008 and 2009.

Getting help. Even people with relatively straightforward situations — perhaps where both partners collect a paycheck from an employer — might want to get a professional’s help, or at least attend a seminar or listen to a webcast offered by professionals with expertise in these issues. Several gay and lesbian organizations are also publishing their own guidance.

But even well-regarded tax programs like TurboTax are recommending that gay couples seek professional help, at least for the first year. (The TurboTax software is up to date with the new rules, but it is not equipped to provide the detailed hand-holding that users are used to).

“This is a very complicated area in taxes and there are currently several interpretations” to the new rules, said Ashley Kirkendall, a spokeswoman for TurboTax. “Given this, we understand that many taxpayers will want and need more guidance than tax software is able to provide at this time. Because of this, we recommend couples with investments, property, pensions, rentals or a business seek professional guidance from a certified public accountant or enrolled agent.”

Here’s hoping your refund isn’t wiped out by the cost of receiving it.

If you’re in this situation, please share some of the major questions that arose when filling out your return.

Article source: http://feeds.nytimes.com/click.phdo?i=f7c270c64379fa7292e2123ef62bc484