Post-DOMA Financial Planning

In late June, the U.S. Supreme Court found that Section 3 of the federal Defense of Marriage Act (also known as DOMA) violates the equal protection clause of the Fifth Amendment of the Constitution. This monumental decision carried with it significant implications for same-sex couples, particularly when it comes to financial planning issues like tax strategies, education planning and retirement accounts.

Generally speaking, planning for same-sex married couples will be very similar to opposite-sex married couples, as same-sex married couples will file either Married Filing Jointly (MFJ) or Separately. For most, but not for all, this should be a benefit from having to file single or head of household due to differences in marginal tax brackets (and corresponding rates) as well the standard deduction, personal exemptions, and Adjusted Gross Income (AGI) phase-out levels. Incomes (and deductions) will be combined, and since each situation is a little different, some taxpayers may be eligible for more benefits, others less.

Read on for a brief overview of how certain areas of financial planning are impacted by this ruling:

Marriage Penalty

  • There are marriage “penalties” for certain items, such as the Net Investment Income surtax that begins in 2013, hitting MFJ taxpayers at $250K in MAGI, versus $200K for single/head of household filers ($250K is a far ways off from the $400K that would be double the single level).
  • Other items subject to a marriage penalty: itemized deduction and personal exemption phase-out levels, ordinary income and long term capital gains rates, child tax credits, IRA deductibility, and Roth IRA contributions.

Education Planning

  • One might find that a single person whose income might have been too high to qualify before for tax credits, such as the American Opportunity/Lifetime Learning Credits, now might be able to via filing jointly.
  • Spouses can now withdraw funds without penalty from their IRA for education expenses for the other spouse. This was not previously available to same-sex couples.

Retirement Accounts

  • Same-sex spouses can now rollover a deceased spouse’s IRAs via spousal rollover, versus treating as a non-spouse beneficiary with an inherited IRA.
  • Same-sex couples can use both spouses’ earned income for purposes of retirement account contributions, in the case that one spouse had earned income and the other did not.
  • Same-sex spouses now receive spousal rights to 401(k)s, pensions, etc.

Overall, same-sex married couples will now enjoy many of the same benefits that were previously only available to opposite-sex married couples. The financial benefits of marriage could be all for naught, though, if you don’t have an effective financial plan in place. If you have questions about how your marital status may affect your plan, meeting with a financial advisor can help clarify what strategies may work best for your specific situation.

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