Ever since the Supreme Court ruled in favor of gay marriage in Obergefell v. Hodges in summer 2015, many same-sex couples have flocked to the altar. The Williams Institute estimates that the number of married same-sex couples has more than doubled since Obergefell. But not all same-sex couples are rushing to the courthouse just yet. The question many are asking is: Now that we can get married, should we? While there may be many religious, cultural and familial decisions that go into answering this question, our clients are generally asking about the financial and tax ramifications of the decision. From that perspective, there are many potential benefits and drawbacks to a legal marriage, some of which this article outlines.
Let’s start with the benefits.
There are many advantages to getting married from an income, gift and estate tax perspective. Following are just a few of the tax benefits that marriage affords.
- Gain from the sale of a home: Subject to certain restrictions, Section 121 of the Internal Revenue Code (IRC) excludes up to $250,000 of gain from the sale of a taxpayer’s primary residence. This exclusion doubles to $500,000 for married taxpayers who file jointly.
- Social Security survivor benefits: A surviving spouse may receive Social Security benefits based on his or her deceased spouse’s earnings record.
- Retirement account contributions: For 2022, single taxpayers can contribute a maximum of $6,000 to an IRA or Roth IRA for the calendar year. Married taxpayers filing jointly may contribute double that amount – $12,000 – even if just one spouse earned the income.
- Retirement account rollovers: Subject to certain limitations, surviving spouses who are the beneficiary of their deceased spouse’s IRA may treat it as their own. This may allow for certain tax deferrals and elongate the span of withdrawal over the surviving spouse’s life expectancy.
- Gift tax: Gratuitous transfers between spouses qualify for the unlimited gift tax marital deduction. In other words, no gift tax is assessed on transfers between spouses. Gratuitous transfers to non-spouses, however, may incur a 40% gift tax to the donor on transfers beyond the applicable exemption amount. In addition, married taxpayers may combine their annual exclusion gifts (up to $32,000 in 2022) and their applicable exemption amounts (up to $24,120,000 in 2022).
- Estate tax: Bequests made to a surviving spouse qualify for an unlimited estate tax marital deduction, such that no estate tax is assessed on bequests made to spouses or to certain kinds of trusts for the benefit of surviving spouses. In addition, subject to certain restrictions, a surviving spouse may effectively “inherit” the deceased spouse’s unused applicable exclusion amount, meaning that a surviving spouse’s applicable exclusion amount could increase to as much as $24,120,000 (in 2022).
There are, of course, many non-tax reasons to consider marriage as well. For example, adopting a child may be easier for those couples who wish to start a family. In addition, legal spouses are allowed hospital visitation rights and access to certain medical information. In many cases, they also can make medical decisions on behalf of their spouse if he or she is incapacitated. Finally, spouses of U.S. citizens and permanent residents who are not citizens themselves may obtain green cards allowing them to live and work in the country.
But don’t forget the drawbacks.
- Marriage penalty: For income earned in 2022, single taxpayers reached the highest marginal federal income tax rate of 37% on all income earned over $539,900. Married couples, on the other hand, hit that same top rate on collectively earned income above $647,850 – well less than double the income of a single taxpayer. This means that two high-earning individuals who get married likely will have a different tax bill than if they had remained unmarried. For example, two people who each earn $700,000 a year will pay over $8,500 more in federal income taxes if they marry. This difference is often referred to as the “marriage penalty,” since it financially penalizes a dual-income marriage from an income tax perspective. There is such a thing as a “marriage bonus,” but this is generally only applicable when one spouse earns very little or no income – a scenario that typically is less likely in same-sex couples than in different-sex couples. It is also important to note that couples cannot escape the marriage penalty by filing their income tax returns separately, since the tax liability of a married taxpayer who files separately is not computed using the more favorable rates paid by single taxpayers. In fact, many deductions, exemptions and credits are not available to those married taxpayers who file separately instead of jointly.1
- Debt and divorce: Marriage might result in spouses being on the hook for each other’s debts and credit history. And while the Williams Institute estimates that the divorce rate for same-sex couples is slightly lower than for their different-sex counterparts, same-sex couples are not shielded from the prospect of an expensive, acrimonious breakup. The rules for what happens to property earned or obtained during marriage differs depending on the state where the couple resides, but divorce can leave one or both ex-spouses bereft of certain prized possessions or property.
- Treatment of trusts: Trusts benefiting spouses or where a spouse is named as a trustee are sometimes treated differently than other trusts under the IRC. For example, trusts that were not previously considered “grantor trusts” may become one as a result of a marriage, which would necessitate a change in income tax reporting from the trust to the grantor, or creator, of the trust. In addition, the IRC ignores certain valuation discounts in intrafamily transfers of interests in family-controlled entities, but unmarried partners are not considered family members for purposes of this rule, so a marriage may affect the gift tax associated with certain transfers that were previously exempt. Individuals who have set up a trust that benefits an unmarried partner or where an unmarried partner is named as a trustee should consult with their attorneys and financial advisors to determine whether a marriage would affect the trust’s tax status.
Overall, any couple considering marriage should consult with their financial advisors and other tax service providers to determine the financial and tax consequences of marriage.