What Supreme Court’s same-sex marriage ruling means for your finances(Read article summary)
The Supreme Court's decision on same-sex marriage did not just give the US marriage equality, but it also will give same-sex couples financial gains. Here's how.
The Supreme Court ruled on Friday that it’s unconstitutional for states to ban same-sex marriage, a historic ruling that is a legal and emotional victory for the LGBT community. But it also means monetary gains for gay married couples who had been denied financial benefits granted to heterosexual couples in many states.
What they spent on health care, for instance, can “now go to saving and investing for couples’ lives or their children,” says Lule Demmissie, managing director of retirement at TD Ameritrade. “As someone who has experienced these challenges first hand, I think it’s important for families to understand the implications for their financial plans and how they can best prepare for the future.”
If you’re in a same-sex partnership, here are some of the key ways the Supreme Court’s legalization of gay and lesbian marriage can positively affect your finances.
“I would say of all the financial circumstances that will be impacted by having same-sex marriages recognized by federal and state government is Social Security, since it’s the foundation of most people’s retirement assets,” says Christopher Jones, chief investment officer of Financial Engines, an independent advisor company. “It’s the foundation of most people’s retirement assets.”
Same-sex couples can now file for benefits as a married couple rather than individually, which translates to significant spousal benefits, Jones says. His company’s research indicates that, depending on a couple’s situation, this new right to marry could be worth between $20,000 and more than $250,000 in additional lifetime Social Security benefits.
Jones explains that spousal benefits allow you not only to claim benefits on your own work history, but on the work history of your spouse, too. This is ideal if you’ve been out of the workforce for a while or earn much less than your spouse. Additionally, “when you file as a married couple and one of you dies, the Social Security administration pays the higher of the two benefit amounts to the surviving spouse, which is particularly important if one spouse is earning quite a bit more than the other.”
Plus, if you defer Social Security, your benefits increase 6% to 8% for each year you wait, Jones says. Social Security is complicated, and there are many strategies to maximize it, he says. “If you’re close to retirement age and a same-sex couple, you really need to think about this decision carefully and educate yourself, because there’s a lot of money at stake.”
Go to Financial Engines’ free Social Security planner to get an idea of how much you can earn.
Same-sex couples for the first time have the option to file their federal tax returns either using “married filing separately” or “married filing jointly.” Having these options is valuable, Demissie says, and means spousal tax benefits and breaks for same-sex couples. Hire a tax professional to help you determine the most advantageous way to file, since it’s unique to each couple.
“Marriage equality would essentially equalize the estate/gift tax benefits,” Demmissie says.
That matters because if you give money to someone you are not married to, you have to pay gift tax if it’s over a certain amount ($14,000 per individual for 2015). This means unmarried same-sex couples wanting to give each other large amounts of money were previously subject to taxation. Married couples are exempt from this and can give money to each other freely while both are alive.
“If you’re close to retirement age and a same-sex couple, you really need to think about this decision carefully and educate yourself, because there’s a lot of money at stake.”
Additionally, “if both spouses are U.S. citizens, they will be able to use the unlimited estate tax marital deduction at death to pass assets to a surviving spouse without incurring federal estate taxes,” Demmissie says.
In simple terms: A surviving spouse inherits money from his or her spouse, tax-free. Up until now, unmarried same-sex couples had to pay estate tax on money left by a partner if the amount exceeded the legal limit ($5,430,000 in 2015). Although this only affects very wealthy individuals, it’s still an important protection available to legally married couples only.
Demmissie says married same-sex couples will now also be “eligible to pass any unused estate tax exemption, as well as any gift tax exemption, to a surviving spouse.”
That’s not to mention survivorship benefits. “If one spouse passes, they can pass on their assets estate tax free, such as a 401(k) or IRA, as is the case for straight married couples today,” Demmissie explains. Unmarried couples don’t get this benefit.
A same-sex partner can now be recognized as a legal spouse for benefit purposes on retirement plans, and as mentioned above, this can be important in estate planning. For example, “in the case of an IRA, if one spouse were to pass before the other, the IRA becomes a spousal IRA [instead of a] beneficiary IRA, which has less strings attached to it,” Demmissie says. “A spouse who is named as the sole beneficiary of an IRA has some withdrawal options that are not available to any other beneficiary.”
There are also contribution benefits only for married couples, and with some retirement accounts, contribution limits are larger for married couples than that of two individuals combined.
Although some employers provided health care to employees’ domestic partners, many same-sex couples weren’t able to be on their partners’ health insurance plans. Now, married same-sex spouses (and their children) can be on the same employer health insurance plan like any other family, saving them money.
The potential financial benefits of same-sex marriage are huge, but keep in mind that there may be some drawbacks, particularly when it comes to taxes and financial aid. For example, if you and your partner have children heading to college soon, consider how getting married would affect their access to financial aid.
“If the couple’s union were recognized, then both incomes would be listed on the financial aid application, impacting the amount of money available to the student,” Demmissie says. Work with a tax professional and/or financial advisor to make sure getting married is the right decision for your family.
Check out NerdWallet’s LGBT Financial Planning Guide for more information on understanding LGBT finances.