The Supreme Court struck down the portion of the Defense of Marriage Act (DOMA) that denied federal benefits to married same-sex couples. This has dramatically changed the emotional and financial lives of the thousands of gay and lesbian married couples around the country. Let’s go through just of few of changes, now that we live in a post-DOMA world.
The first impact is on Social Security benefits. Same-sex married couples can now receive spousal and widower benefits. What does this mean? Well, one example is that a married person can collect 50 percent of their spouse’s Social Security benefit while their spouse collects 100 percent of their benefit. This allows many strategies that opposite-sex couples have used for years. A common strategy is to receive 50 percent of your spouse’s Social Security allowing you to delay taking your own benefit while it increases.
Another Social Security benefit helps widowers. A surviving spouse can either receive 100 percent of their own benefit or their deceased spouse’s benefit, whichever is higher. Also if your spouse dies while you are still raising children under 16 years old, the surviving spouse can begin collecting Social Security benefits. The surviving spouse can also begin collecting widow benefits as early as age 60.
Same-sex married couples will now receive survivor benefits for their spouse’s pension. During DOMA, the surviving spouse would not get any pension payments once their spouse passed away (unless the pension specifically included same-sex partners). To account for this risk, the common planning technique was to buy life insurance for the spouse with the pension. This financially protected the surviving spouse. Now with DOMA repealed, the surviving spouse will still get some percentage of their deceased spouse’s pension. This is huge for those spouses that have a pension, but are unable to get life insurance because they are HIV+ or a cancer survivor.
Without DOMA in the way, transferring retirement accounts from a deceased spouse to the surviving spouse just became a lot easier and more beneficial. 401(k)s and IRAs will now automatically transfer to the surviving spouse (remember, only if you are legally married). The surviving spouse will not have to immediately begin withdrawing from those accounts creating taxable income. They can keep the money in these tax-deferred accounts until the money is needed in retirement.
Filing federal tax returns for married couples will be less arduous as well. A joint federal return can be filed for the couple rather than submitting two individual tax returns. However, this doesn’t mean you will pay less in taxes. Married same-sex couples will now be hit with the “marriage tax penalty” just like their opposite-sex counterparts. For registered domestic partners (RDP’s), I believe you will still need to perform the “income splitting” exercise that you do now. Everything is still too new to understand how these rulings will impact RDP’s, but all will hopefully be cleared up well before next April.
Some final benefits I’ll mention are:
A spouse will not pay taxes on health insurance benefits if they have their spouse on their employer’s health insurance plan
Married same-sex couples won’t have to worry about exceeding the $14,000 annual gift limit if they transfer assets between each other
A surviving same-sex spouse will no longer have to worry about paying estate taxes (but everyone, gay or straight, still needs proper estate documents!).
This is a just a short list of the many financial benefits same-sex married couples will now receive with the repeal of DOMA. This is a historical decision by the Supreme Court that will have a positive impact on all current and future same-sex married couples for generations to come.
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.
