Last week, the IRS ruled that all same-sex marriages will be recognized for federal tax purposes, following up on June's Supreme Court striking down provisions of the Defense of Marriage Act denying same-sex couples federal recognition of their marital status. Many same-sex married couples applauded the move, arguing that it's one more step toward full recognition of their marriages.
Yet for some same-sex couples, being treated as married for federal tax purposes could actually increase their tax bills. Let's take a look at some of the negative implications of the new IRS policy from the standpoint of same-sex spouses.
1. The marriage penalty will hit many same-sex spouses, especially those with roughly equal incomes.
The IRS ruling will force same-sex spouses to face the same apparent inequities as their married opposite-sex counterparts. Under certain circumstances, federal tax law imposes higher total taxes on married couples than they'd have to pay if they could each file as single individuals. Especially with higher-income couples, threshold limits for higher tax rates often start at far less than double the corresponding limit for single filers, leading to bigger tax bills. In addition, married couples who file separate tax returns often face limitations and restrictions on deductions that single filers don't. With several new provisions taking effect this year, including the Medicare surtax and the return of the 39.6% tax bracket on the highest-income earners, many same-sex spouses will have to pay more in tax because of the ruling.
2. Same-sex spouses will lose access to benefits available to single filers.
In addition to the marriage penalty resulting from treatment of income and deductions, same-sex spouses will find themselves missing out on certain provisions that they qualified for as single individuals. For instance, the Earned Income Tax Credit provides a refundable credit to low-income individuals, with benefits for those with three or more children amounting to as much as $6,044 for 2013. As single filers, one member of a same-sex couple with relatively low income could claim the credit even if the other member had large amounts of income. But under the new rule, joint filers would have to take both spouses' earnings into account, thereby disqualifying some same-sex couples from taking the credit. Other similar impacts could occur for deductions and credits that rely on income limits for eligibility, including tax breaks for education expenses and the child tax credit.
3. Tax laws affecting divorce will give same-sex spouses more to fight over.
Entering a marriage has major financial implications for couples, but so does dissolving a marriage. With the IRS ruling, same-sex spouses will have to deal with the tax laws governing divorcing couples if they decide to split up. In general, a spouse who pays alimony is entitled to a tax deduction for the amount paid, and the spouse who receives alimony payments must include them as income. By contrast, amounts characterized as child support, as well as certain other types of property settlements, aren't treated as alimony and therefore don't have an income tax impact on either spouse. Because divorcing spouses have some leeway in agreeing whether particular asset transfers get treated as alimony or not, the tax issues can become contentious during divorce proceedings. Same-sex spouses will now have to face those same issues if they choose to divorce.
Weighing the costs and benefits
With the IRS ruling, all couples considering marriage will now face the same financial conundrum in deciding whether their tax bills will go up or down as a result or their nuptials. Same-sex couples need to consider both the benefits and the pitfalls of married filing status in evaluating whether tying the knot makes good money sense.