same-sex couple getting married

Dollars and Sense of Same-Sex Marriage

Jul 13th 2015
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Now that the US Supreme Court has announced its decision on same-sex marriage, a key question for some clients remains: Does it make sound financial sense for same-sex couples to marry?

Obviously, the answer depends on the particular circumstances, but the financial positives will generally outweigh the negatives, even though many couples will collectively owe more income tax in the process.

Let's start with the main drawback first: taxes. Just like heterosexual couples, same-sex couples will have to cope with the “marriage penalty” which occurs when middle-to-upper income spouses earn roughly the same amount of income. Due to the narrowing of the tax brackets at higher-income levels, such a married couple filing jointly will likely pay significantly more tax than they would have if the filed individually. It could also result in alternative minimum tax complications. Conversely, if one spouse is the main breadwinner and the other has relatively little income, they may fare better as joint filers than each filing individually.

Despite the prospect of paying the marriage penalty, there are plenty of financial incentives for same-sex couples to marry, including the following:

Estate planning. Estate and gift taxes are quite a different story than income taxes. Transfers between spouses are completely exempt from tax in both life and death. Thus, one spouse can leave his or her entire estate to the other without any estate tax liability. Furthermore, the estate of a surviving spouse may utilize the unused portion of a deceased spouse's estate tax exemption under the “portability provision.” For most couples, it's a win-win situation.

Social Security benefits. Again, this depends on the financial records of both spouses, but a surviving spouse will often qualify for an increased amount of Social Security benefits based on the earnings history of a deceased spouse. This advantage might be taken for granted by heterosexual couples but could trigger newfound savings for same-sex couples. Accordingly, a legal union may provide a couple with greater flexibility in retirement planning.

Qualified plans and IRAs. For same-sex couples where one or both spouses have a qualified retirement plan, like a 401(k), the distribution options available to a married couple can be beneficial. Marriage can also simplify matters, but clients should be cautioned to update beneficiary forms. Similarly, a marriage of a same-sex couple may result in deductions for traditional IRA contributions or the ability to contribute to a Roth IRA due to higher annual limits for joint filers than single filers. It could also create an opportunity for a spousal IRA where one spouse doesn't work.

Health insurance. This is yet another instance where more choices could be available to married couples than single individuals. For instance, if one spouse has inadequate health insurance coverage, he or she may be able to obtain improved or less expensive coverage, or both, by applying under the other's spouse's plan.

This is not to say that a same-sex marriage is a financial slam-dunk by any means. There are numerous potential complications, especially where children are involved. However, as a general rule of thumb, clients will be better off financially after they tie the knot.

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