The journey to marriage equality has been long and winding, but for LGBTQ+ couples, it has unlocked a new realm of tax considerations. While filing jointly can bring significant financial advantages, it’s a path that demands careful navigation. This post pulls back the curtain on the key tax benefits, potential pitfalls, and strategies LGBTQ+ couples should understand. From maximizing credits to mitigating marriage penalties, informed decision-making is the key to optimizing your financial future as a couple considering marriage.
File Joint Tax Returns to Benefit from Tax Credits
For most Americans, the tax system looks the same. With the recognition of same-sex marriages, LGBTQ+ couples now have access to many of the same federal tax benefits as opposite-sex married couples. Couples who file a joint tax return often benefit from a larger tax refund or lower tax liability (although not always the case). Joint filers usually receive higher income thresholds for certain tax breaks, allowing them to deduct a substantial amount of income when calculating taxable income.
However, there are still some distinctions to consider. For example, if you or your partner has children from a previous relationship, the tax treatment of those children may differ from biological or adopted children within your current marriage. Additionally, transgender individuals who have undergone a legal name change use that name on all tax documentation; those who have not must use their given name at birth.
One 2010 landmark legal decision – O’Donnabhain v. Commissioner of Internal Revenue – has been particularly beneficial for the trans community. The court ruled that hormone treatments and other gender-affirming care qualify for the same medical expense deduction as other medical treatments do. The ruling deemed gender-affirming care as a medical necessity, reversing a previous stance that claimed the care was purely cosmetic. The health care tax deduction allows you to deduct medical care expenses that exceed 7.5% of your adjusted gross income.
LGBTQ+ couples who file together qualify for multiple tax credits, including:
- Adoption Credit: Those who adopt children can qualify for a tax credit that reduces their taxable income the year they complete the adoption.
- Child and Dependent Care Credit: This credit provides relief to individuals and spouses who pay for the care of a qualifying child or disabled dependent while working or looking for work.
- Earned Income Tax Credit: This credit provides a tax break for low- and moderate-income individuals and families. While not LGBTQ+ specific, this can prove beneficial since the community faces higher levels of poverty.
Reduce Federal or State Estate Taxes
If you die in 2024 and your estate is worth more than $13.61 million, you will owe federal estate taxes (doubled if you’re married). Starting in 2026, that amount reverts to its pre-TCJA level of $5.6 million per individual, unless Congress acts to extend or make it permanent. While most people can avoid the current estate tax problem, many will find themselves navigating the adjusted provisions in about 18 months.
However, same-sex couples who are married can now benefit from the unlimited marital deduction for federal estate and gift taxes. This allows one spouse to transfer/gift an unrestricted amount of assets to their spouse at any time, including – but not limited to – at the time of the transferor’s death, free of tax.
Same-sex spouses also may now enjoy tax-free rollovers from their deceased spouse’s retirement accounts without penalty, and they can take required minimum distributions (RMDs) starting at their own required beginning date (if RMDs had not already begun for the deceased).
State estate taxes currently (and will likely continue to) affect more people. Not all states impose a state estate tax, but you should consider it if yours does. Check here to see if your state has an estate or inheritance tax. Unfortunately for our local residents, Maryland is the only state that imposes both an estate tax and an inheritance tax.
Beware of the “Marriage Tax Penalty”
While filing jointly provides many benefits otherwise not available in domestic partnerships, there are some risks:
- Joint and Several Liability: If you marry someone who does not report his or her income and the IRS discovers it, even if you knew nothing about it, you are responsible for covering the tax bill. Innocent spouse relief can serve as protection, but under very specific circumstances.
- SALT Deduction: The state and local tax deduction is now limited to $10,000. A high-income household for joint filers can deduct the same $10,000 that two unmarried people could each deduct if filing single.
- Tax Brackets: If you are a single individual paying taxes, you don’t reach the top bracket until you hit $609,351 (2024). If you are a married couple filing jointly, you reach that bracket at $731,201. So, two single taxpayers making $609,000 each never reach the top bracket, but a married couple with each spouse earning $609,000 pays higher taxes on that last $486,799.
- Capital Losses: Whether filing as a single individual or married jointly, you can deduct up to $3,000 of capital losses against ordinary income in a given year. This amount does not increase if married.
Taxes may not be the most romantic topic, but for LGBTQ+ couples, understanding the nuances can pay dividends. From the impact to estate planning to navigating credits and deductions, the tax landscape is ripe with both opportunities and challenges. It is pivotal to consult a tax professional well-versed in LGBTQ+ taxation. Your tax and financial professional team can help you take advantage of appropriate tax benefits while remaining vigilant of tax blindsides.
