At this time of year, as W-2s, 1099s, and other tax forms start to arrive in the mail, many same-sex partners are facing a new obligation—filing their income taxes as a married couple. Preparing taxes has never been fun, but the law now makes it easier than ever for gay and lesbian couples who are legally married.
Back when same-sex marriage laws varied from state to state, and the federal government did not recognize gay unions at all, filing as a married couple was an ordeal. Couples who lived in states that recognized their unions might have had to prepare four tax returns—a “phantom” joint federal tax return that was never filed but that had to be prepared in order to determine the couple’s state taxes, a joint state return, and two individual returns with the federal government, which restricted the definition of marriage to opposite-sex couples.
What a difference a Supreme Court ruling makes.
In the wake of the high court’s decisions in United States v. Windsor and Obergfell v. Hodges, same-sex marriage is now legal nationwide at the state and federal levels. As a consequence, couples who have tied the knot can take pleasure in checking the “married” box on their state and federal tax returns.
To determine whether a couple is married, the IRS looks to their marital status as of December 31 of the tax year in question. So couples who were wed anytime last year are considered married for the whole year.
The law now makes it easier than ever for married gay and lesbian couples to file their tax returns.
Once two people have exchanged vows, filing their taxes as “unmarried” is no longer an option. But most couples will enjoy a “marriage bonus” in the form of a lower combined tax bill. Returns can be set up as “married filing jointly” or “married filing separately,” and each option has its pros and cons.
Most couples will come out ahead by filing jointly. The tax bracket for joint filers is twice the amount for couples who file separately. As a result, filing jointly can lower their combined tax bill if one spouse earns significantly more than the other.
In certain circumstances, however, filing separately can be the smarter choice, especially if one partner came to the marriage with a significant tax debt. A joint filing can put the paid-up spouse on the hook for the other spouse’s outstanding tax bill. The IRS can even seize any tax refund each year until the debt is satisfied.
Another factor in determining whether to file jointly or separately is the deductions the couple plans to take. When a married couple files separately, they both have to use the standard deduction or they both have to itemize. As a consequence, having more deductions to work with will provide them with better options for minimizing their tax liability.
For example, in addition to customary deductions like mortgage interest, charitable contributions, and real estate taxes, a couple may have unusually high medical expenses in a given year. Qualified medical costs can be claimed as itemized deductions if they exceed a certain percentage of the person’s adjusted gross income. The spouse who incurred the expenses may be able to exceed the deduction threshold if the couple submit separate returns.
Couples in the higher tax brackets who earn roughly the same amount may see their tax bill increase under the “marriage penalty.” The penalty affects a minority of married couples, but it can be significant. Two people who are contemplating marriage should ask a tax professional whether they will have to pay more.
Taxes may be the last thing a couple thinks about when deciding whether to marry. But as so many couples say on their wedding day, they take each other for richer or poorer.