Taxes for married same-sex couples

Last year was big for same-sex marriage. The Supreme Court ruled that the Defense of Marriage Act, or DOMA, was unconstitutional and Proposition 8 was overturned. As we all know, same-sex couples can now legally marry in California. What you may not know is how this impacts your taxes.

The first difference for 2013 is that married same-sex couples now must file a joint federal tax return or as married filing separately. They cannot file as single. This is true even for married couples that live in a state that doesn’t recognize same-sex marriage.

This simplifies tax filing for California couples that previously had to file separate individual federal tax returns and go through that horrendous “income-splitting” exercise. Unfortunately, Registered Domestic Partners still need to file individual returns since they are not legally married.

The other change that most couples will notice is that they won’t pay taxes for having their spouse on the company health plan. Previously, it was considered taxable income to do this. That’s no longer true and will lower the tax bill for most couples.

I say “most” because some married couples may actually see their taxes increase. The marriage penalty will hit couples where both spouses have high incomes. What exactly is the marriage penalty? I’ll try to explain without putting you to sleep.

Different tax rates are paid on higher amounts of income. Think of each tax rate as being a different bucket that fills up with cash. For a single person, they have a bucket of money that gets taxed at a 15 percent tax rate. This 15 percent bucket goes up to $36,900 of taxable income. If a single person has taxable income higher than $36,900, then the excess income starts filling up the next tax bucket, which gets charged a 25 percent tax rate. The 25 percent bucket goes up to $89,350 of income. If a single person makes even more than $89,350, then that excess income starts filling up the 28 percent bucket.

Saying it a different way, a single person’s 15 percent tax bucket goes up to $36,900 of taxable income and their 25 percent bucket goes up to $89,350.

For married couples, their 15 percent tax bucket goes up to $73,900. That makes sense because that is twice the amount of what a single person pays on income up to $36,900. So the 15 percent tax bucket for a married couple is twice the amount of a single person.

Here is your SAT question: How much income goes into the married couple’s 25 percent bucket knowing that a single persons 25 percent tax bucket goes up to $89,350 of income?

Did you calculate $178,700? That is twice the amount a single person pays, so that would be the sensible answer. However, you would be completely wrong! Married couples get a 25 percent bucket that only goes up to $148,850 of income. Any income earned above this amount starts filling up the 28 percent tax bucket. This, my friends, is the marriage penalty.

A non-married couple could each have taxable income up to $89,350 and stay in the 25 percent tax bracket. But if they got married, they would file a joint return with $178,700 of taxable income putting a big chunk of their income into the 28 percent tax bucket.

Hopefully that makes sense. I warned you it was a sleeper. The big takeaway is that two high earning spouses will probably get hit with the marriage penalty. But don’t let the tax tail wag the dog. If you want to get married, then go do it. Don’t let taxes stop you.

The final topic to cover for married same-sex spouses has to do with filing amended returns. A taxpayer may file a claim for refund for three years from the date the return was filed. California couples married in 2008 may want to look into amending their returns for the past three years.

Maybe one spouse was paying taxes on having their husband or wife on their employer health plan. You might end up with a refund by amending the last three years tax returns by filing as married instead of two people filing as single.

Turbo Tax has calculators for 2010, 2011, and 2012 to determine if you can get money back. All you need are the individual returns you and your spouse filed for those years. Then go to the Turbo Tax Web site and follow the instructions for these free calculators. The Web site is https://turbotax.intuit.com/tax-tools/calculators/taxcaster/past/

You can file amended returns if the calculators show you can get a refund. If you’d pay more, then don’t file amended returns. It’s completely optional to file amended returns for couples married in 2008.

Congratulations if you made it to the very end of a tax article. Now go hire an accountant.

Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.