Top-earning gay couples who married in states where the law permits it may soon be paying more in income taxes as the U.S. Supreme Court considers the legality of same-sex unions.
Right now, couples’ finances are often complicated by the division between federal and state law: They’re able to handle their finances and tax-filing jointly under their state’s law while the federal government––which doesn’t recognize the marriages––treats them as though they are single.
For gay couples where both earners are making salaries of $400,000 a year or more, the ruling may mean thousands of dollars in higher income taxes if the court accepts the legality of these unions. Such high-earning couples already may have added costs when they file their taxes, share employee benefits such as health insurance and transfer assets.
“There will be a whole new raft of planning for people,” said Alex Popovich, a wealth adviser at New York-based JPMorgan Chase & Co.’s private bank unit. “There’s so many different nuances.”
The Supreme Court will consider gay marriage for the first time this month in two cases. One is a dispute over a California ballot measure banning the practice. The other is a challenge to a 1996 federal law called the Defense of Marriage Act, which defines marriage as solely a union between a man and a woman. The court is expected to rule in the cases by June.
The rulings may not legalize gay marriage nationally, meaning that same-sex married couples who move to states that don’t recognize their union would still face challenges with their finances, estates, employee benefits and other rights.
More than 1,000 federal rights and benefits involve marital status, said John Olivieri, a partner in the private clients group at White & Case LLP in New York.
Not every couple would be hurt, and most would see some advantages in other parts of their personal finances. Wealthy gay married couples would be able to delay estate taxes if their unions were legalized, for instance. Still, there are detriments to being married from a federal tax standpoint.
A disadvantage for high-earning couples on the income-tax side is the marriage penalty. Currently, two partners each earning $400,000 a year in taxable income don’t pay the top rate of 39.6 percent, which starts at income above that amount for singles and at $450,000 for married couples.
‘Kind of Brutal’
If the federal law is overturned and the same-sex spouses file jointly, their combined income is $800,000, of which $350,000 would be subject to the highest federal rate. “That’s kind of brutal,” Olivieri said.
Gay couples who are legally married in a state will experience pros and cons if the Supreme Court finds the act, known by its acronym DOMA, unconstitutional and have to plan for them, he said.
“The biggest impact for DOMA being repealed especially for wealthy same-sex couples is the availability of the federal estate-tax marital deduction,” said Lisa Siegel, senior wealth planner at Wells Fargo & Co.’s private bank unit. “That completely changes estate planning for same-sex couples.”
The case being heard by the Supreme Court involves New York resident Edie Windsor, who sued the federal government over a $363,000 estate-tax bill imposed after her spouse died. Same-sex spouses aren’t treated as married for federal tax purposes, which means when one spouse dies their assets don’t transfer to the survivor free of estate taxes.