Tax Considerations for LGBTQ+ Couples
Anyone who has watched the TV series Modern Family knows about the delightful chaos that permeates the home of Mitchell and Cameron. They’re married fathers whose personalities couldn’t be more different, with emotional Cameron being the perfect foil for Mitchell’s buttoned-up style. The couple, who got married during the series’ fifth season, often depicts the hilarity that can come with marriage and parenthood. But, what the show doesn’t depict are the complicated legal constructs that the couple would have needed in real life to protect their joint property and parenting rights before they got married.
In 2013, in the case of United States v. Windsor, the Supreme Court ruled that the federal government must recognize same-sex marriage, thereby offering same-sex married couples the same federal benefits as heterosexual married couples, such as the right to portability of the federal estate tax exemption, to name one example. In 2015, the Supreme Court ruling in Obergefell v. Hodges made marriage equality the law of the land in all states. Given the 2022 overturn of Roe v. Wade, joined with unfavorable comments by Justice Clarence Thomas, the potential for the Obergefell ruling to be overturned is a valid concern. However, it’s not productive to speculate at this point, so let’s talk instead about a few important tax considerations that now exist in the era of marriage equality.1
As with any changes to legislation or, in this case, access to benefits not previously afforded, we recognize there can be confusion on what it all means and what may apply to you, especially with regard to tax filing. While couples in domestic partnerships or civil unions are not permitted to file their federal income taxes jointly,2 married couples have the right to do so, in addition to a host of other changes, including:
- The portable estate tax exemption, which protects the married couple’s property from estate taxes when one spouse dies3
- A higher standard income tax deduction4
- The ability to claim various credits, such as the adoption credit and child dependent care credit, as well as the American Opportunity and Lifetime Learning credits5
These and some other benefits have the potential to deliver significant tax and other advantages. In some cases, the higher standard income tax deduction and estate tax exemption are important to the strategic design of many estate plans. In other cases, it may be a better option for couples—especially couples without children and those who have a significant pay disparity—to file married but separately.
Same-Sex Filers as a Percent of Joint Filers
By state and year of same-sex marriage legalization
Source: BROOKINGS – Gay Marriage in America after Windsor and Obergefell; Fisher, Gee and Looney, February 28, 2018
Adoption and same-sex couples
Navigating the new legal landscape to help achieve your greatest advantage generally requires some forethought. For example, same-sex couples are roughly four times more likely than other couples to adopt,6 and there are an estimated two million LGBTQ+ people interested in adoption. However, spouses who adopt a husband’s or wife’s child (or children) are not entitled to the adoption credit,7 which is $16,810 in 2024.8 Those planning on getting married and adopting a spouse’s child or children may find it worthwhile to delay their nuptials and complete the adoption first, in order to be eligible for the credit. Other qualified adoption expenses include those paid by a registered domestic partner who lives in a state that allows same-sex second parents to adopt their partner’s child.
Legal documents and same-sex couples
Married couples who have created complicated legal agreements to protect their rights, children and property may wish to consult with their attorneys to ensure that these agreements align with their new rights. For example, marriage is typically a good time to revisit an estate plan and ensure that each person’s will, advance directives and beneficiary designations accurately reflect their wishes. Committed couples in domestic partnerships or civil unions may wish to consult with their tax and financial advisors to review the impact that marriage may have, as well as how to best plan for their specific situations.
In this era of marriage equality, same-sex couples, particularly those who have been together for many years and may have complex financial situations or possibly own a business, should carefully consider the financial and legal impacts of marriage. We believe that with some planning and the right advice, it’s possible for the modern family to plan for their “happily ever after” while also planning ahead to maximize benefits and mitigate potential negative effects.
1 https://www.hrc.org/news/four-cases-that-paved-the-way-for-marriage-equality-and-a-reminder-of-the-w
2 https://www.irs.gov/newsroom/answers-to-frequently-asked-questions-for-registered-domestic-partners-and-individuals-in-civil-unions
3 https://www.bankrate.com/taxes/estate-tax-issues-same-sex-marriage/
4 https://www.taxfyle.com/blog/tax-benefits-of-marriage#:~:text=Married%20couples%20filing%20jointly%20receive%20a%20much%20larger,double%20the%20%2414%2C600%20standard%20deduction%20for%20single%20filers.
5 https://www.investopedia.com/articles/personal-finance/080415/gay-marriage-and-taxes-everything-you-should-know.asp
6 https://www.lifelongadoptions.com/lgbt-adoption/lgbt-adoption-statistics
7 https://www.irs.gov/newsroom/understanding-the-adoption-tax-credit
8 https://www.adopthelp.com/the-2024-federal-adoption-tax-credit/
ABOUT THE AUTHORS
Lisa Neira, CFP
Lisa is a Wealth Advisor in our Morristown, NJ, office. Lisa joined legacy firm RegentAtlantic in 2021, bringing over 15 years of experience in wealth management and providing financial advice to high-net-worth individuals and families. She advises clients on financial planning, tax planning and investment management to help them achieve their financial goals leading up to and through retirement. Lisa specializes in working with LQBTQIA+ clients and their families, and understands the unique financial challenges this community generally faces. She also serves as a LGBTQIA+ planning resource to other advisors across the firm. She is a featured speaker and has been quoted in financial news media, including Asset TV, Barron’s Advisor and InvestmentNews. Lisa holds the CERTIFIED FINANCIAL PLANNER™ certification. She graduated from Richard Stockton School of New Jersey, earning a Bachelor of Science in Business Studies with a concentration in finance and economics. Prior to joining RegentAtlantic, Lisa was a VP, Wealth Planner at Fidelity Investments. Lisa resides in Cedar Grove, New Jersey, with her wife, Mindy Neira and their daughter Jackson. She enjoys traveling, cooking for her family, running around with her puppy, Avery, and watching her favorite sports teams. She is an avid fan of the Nets, Jets and Yankees.
Barbara Bilello
Barbara is a Partner, Wealth Advisor in our Morristown, NJ, office. Since 1996, she has provided tailored services and customized advice that help high net worth clients and their families to build and protect their wealth across generations. Barbara joined legacy firm RegentAtlantic in 2017, was named Co-Chair of the firm’s Wall Street Women Forum in 2021, was named as Partner in 2021 and launched the firm’s LGBTQ+ practice. Her previous experience includes positions with U.S. Trust and Goldman Sachs & Co. Barbara holds a bachelor’s degree from Providence College in Rhode Island. A sought-after speaker on wealth management and an active volunteer, Barbara has helped to provide early learning experiences for young children, raise funds for the Pancreatic Cancer Action Network (PanCAN), mentor women and ensure the LGBTQ+ community gets the representation, advice and strategies it needs to succeed. She and her family split their time between Williamsburg, Brooklyn, and Asbury Park, NJ.
CONTENT DISCLOSURE
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