The 2015 Obergefell v. Hodges Supreme Court decision streamlined tax and estate planning for married gay and lesbian couples. If you are filing a joint tax return for 2016 or thinking about updating your estate plan, we have some important things to remember.
You can file jointly for 2016 if you married at any time during 2016. Under federal tax law, your marital status on the final day of a year determines your filing status. (The same rule applies for divorcing couples.) If you are newly married or have not considered filing jointly, the fact is that most married couples can potentially benefit from that choice.
Extremely high earners may find joint filing disadvantageous, but they are the exception to the norm. If you have or want to have children, you will need to file jointly to qualify for the Child and Dependent Care Tax Credit. Filing jointly also makes you eligible for Lifetime Learning Credits and the American Opportunity Tax Credit.
The irritation of filing state tax returns under a different status is history. Now that same-sex marriage is legal in all 50 states, no gay or lesbian married couple has to go through this any longer.
You can gift greater amounts to family & friends. Prior to the landmark 2015 SCOTUS ruling, same-sex spouses were stuck with the individual gift tax exclusion under federal estate tax law. A gay or lesbian married couple could not pair their $14,000 per-person allowances to make a gift of up to $28,000 to another individual as a couple, as straight married couples could. Now, same-sex spouses can gift up to $28,000 to as many individuals as they wish, per year. Tax consequences will only occur when the amount of gifts given over a lifetime surpasses the lifetime estate and gift tax exclusion (which is $5.49 million in 2017, rising from $5.45 million in 2016).
You can take advantage of portability. Your $5.49 million individual lifetime estate and gift tax exclusion will not only be adjusted upward for inflation in future years; but it will also be portable. Under the portability rules, when one spouse dies without fully using the lifetime estate and gift tax exclusion, the unused portion is conveyed to the estate of the surviving spouse. So, if a spouse dies in 2017 having used only $2.1 million of the $5.49 lifetime exclusion, the surviving spouse thereby ends up with an $8.88 million lifetime exclusion.
The unlimited marital deduction is also now available to gay & lesbian couples. This is the basic deduction that allows one spouse to pass assets at death to a surviving spouse without any federal estate tax effects.
Remember to check on state tax laws. In which state do you reside? Investigate the tax laws in that state, preferably with the help of a tax or financial professional. Things do change: New Jersey, for example, is repealing its estate tax in 2018, while keeping its inheritance tax.
Marriage equality has made things so much simpler. The hassle and extra paperwork that some gay and lesbian couples had to face in the past at tax time is, happily, now a thing of the past.