After the Internal Revenue Services' recent announcement that it will now recognize same-sex marriages (even if couples reside in a state that does not recognize their union), gay couples had reason to celebrate. For many people, the rule change means lower taxes and marks an important federal milestone. It also means that legally married couples can move to any other state, and the IRS will still recognize them.
In addition, same-sex married couples can file for any refunds that they might be eligible for from the past three years. Potential financial benefits from this change include deducting expenses related to joining health insurance plans, avoiding inheritance tax after the death of a spouse and the ability to open spousal individual retirement accounts.
Marriage can also come with extra costs, especially for two high-earning spouses. That’s because of the so-called “marriage tax,” in which a married couple faces higher tax together than they would separately. Same-sex couples who anticipate a higher tax bill as a result of this change can start preparing for it by paying more to Uncle Sam throughout the year by lowering their tax deductions on their W-4 form. Other financial moves, such as buying a home, donating to charity or putting more money into retirement accounts can also help reduce one’s tax burden.
[Read: Gay Retirees Face Extra Challenges.]
Same-sex couples that include one high-earning partner and one who earns much less or nothing will likely see their tax bill go down. The marriage penalty, after all, was designed to be a marriage bonus for traditional couples featuring one primary breadwinner. "The more equal the two incomes are, the greater chance of a marriage penalty," says Mark Luscombe, a tax analyst for the firm CCH.
There’s also the potentially high cost of divorce to consider: “Glee” star Jane Lynch is currently facing spousal support requests from her wife of three years, Lara Embry, who is requesting almost $100,000 a month, according to court documents.
Despite the IRS move toward greater equality, gay couples still face other financial hurdles. As The New York Times’ Tara Siegel Bernard points out in a recent article, Social Security and veterans’ benefits for same-sex spouses are still unclear. And in states that have yet to recognize same-sex marriage, couples will have to go through some extra paperwork hurdles in order to file a single or head of household status for the state return.
Also, couples who are not married but joined by a civil union or domestic partnership face a different set of rules because the IRS decision only applies to those who have married in a state where it is legal to do so (even if they have since moved elsewhere).
Financial professionals are scrambling to provide updated guidance to help same-sex couples navigate this new terrain. Carrie Schwab-Pomerantz, senior vice president of Charles Schwab, suggests that couples think in advance about whether it makes sense to file joint or separate returns, and to consider filing for a refund for any of the last three years.
Because not everyone benefits financially from filing together, Schwab-Pomerantz recommends running the numbers for both options before deciding. She also recommends updating any existing estate plan since the IRS rule change means that same-sex couples will no longer have to pay estate taxes when they inherit their partner’s money.