By Karl Schwartz, CFP
Learn more about Karl on NerdWallet’s Ask an Advisor
Financial planning guidelines for same-sex couples have changed dramatically with the recent Supreme Court ruling about the Defense of Marriage Act (“DOMA”). This ruling strikes down the provisions of DOMA that previously prevented same-sex married couples from receiving federal marriage benefits.
Individuals in a same-sex marriage are now able to take advantage of several federal benefits that they were previously denied. Some of the more significant benefits include: spousal benefits for Social Security, marital deduction and portability for estate tax purposes and a simplified income tax return process.
Spousal benefits for Social Security could potentially have a significant impact on a couple’s retirement income. In a simple example, if one spouse is receiving $20,000 a year in benefits, the other may now be able to file based on the other spouse’s earnings record and receive up to $10,000 a year.
The marital deduction and portability of the estate tax exemption allows one spouse to pass their assets on to the surviving spouse without incurring any estate tax. In addition, portability may allow the surviving spouse to use any portion of the deceased spouse’s unused exclusion amount upon their passing. The marital deduction and portability of the estate tax exemption may make the largest financial impact, but it will likely apply to wealthy couples with estates greater than $10M.
Same-sex married couples will now be able to simplify their tax lives due to their ability to file a joint tax return on both federal and state levels (depending of course upon the laws in applicable states). They may also take advantage of retroactive tax treatment rules that allows couples who originally filed their returns as something other than “married filing jointly” to amend certain of their prior returns and file jointly with their spouse if warranted.
One area that same-sex couples will still need to approach with caution is applicable state laws. Because same-sex marriage is legal only in certain states, there is a chance that federal benefits can be jeopardized if the couple established their residence in a state that does not recognize same-sex marriage, even if they were married in a state that permitted same-sex marriage.
The Supreme Court ruling over the constitutionality of DOMA may cause one of the largest impacts on the receipt of federal benefits for individuals in this country. These newly available federal benefits will likely significantly improve the financial outlook of many same-sex married couples, but these couples still need to tread tax and financial planning cautiously. Utilizing the skills a Certified Financial Planner™ can help couples take proper advantage of federal and state benefits.
Examples are hypothetical in nature and are for illustrative purposes only. Hewins Financial Advisors, LLC ( “Hewins”) is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein, including but not limited to other blogs, websites or articles, is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of third party or any of its content or use of its content. The standard information provided in this article is for general educational purposes only and should not be construed as, or used as a substitute for, financial, investment, or other professional advice. If you have questions regarding your financial situation you should consult your financial planner, investment advisor, attorney or other professional. Hewins is a proud affiliate of Wipfli LLP. A copy of Hewins’ current ADV Part 2A discussing Hewins’ investment advisory and financial planning services and fees is available for review upon request or at www.adviserinfo.sec.gov.