How the Supreme Court Ruling Cuts the Cost of Being Gay

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Welcome to the marriage penalty, gay couples! And the end of the health care benefit tax penalty, along with added Social Security benefits — at least in the 13 states where gay marriage wasn’t formerly legally recognized.

While emotions overflow about last week’s Supreme Court ruling, it’s easy to overlook the real-world impact of the decision on gay couples. From a personal finance perspective, being a gay couple is complex. But it will be a bit less complicated now.

(For more on gotchas that typical consumers face, visit Bob Sullivan’s Gotcha archive.)

A couple’s lifetime cost of being gay was calculated in a great piece written several years ago by Tara Siegel Bernard and Ron Lieber. In its worst-case scenario, the price tag was nearly half a million dollars. Under other circumstances, the gay couple penalty fell to about $41,000. The article was based on a series of assumptions that you should read on your own. It also predated the 2013 Supreme Court ruling that struck down parts of the Defense of Marriage Act, which were very costly to gay couples. Since then, the lifetime cost of being gay has depended a lot on where you live.

Friday’s ruling means gay couples will no longer have to pay a tax penalty when one spouse has employer-provided health care coverage. Before 2013, all gay couples were subject to the health benefit federal tax penalty. If an employee enrolled a gay partner in health insurance, the added cost of the plan borne by the employer was considered imputed income and subject to local, state and federal tax. Opposite-sex spousal coverage is tax free.

To see how painful this could be, an anonymous gay friend of mine got a kick in the teeth when her spouse lost her job not too long ago. While she was lucky enough to get the spouse added to her company’s health benefits, a second kick came when she found out she had to pay taxes on $400 additional “income” per month.

After the 2013 ruling, the federal tax obligation on this benefit was eliminated, but some state tax obligations remained.

“If your state does not recognize your marriage, you will probably have to pay state income taxes on these benefits,” says Lambda Legal, in an excellent blog on the topic from earlier this year.

Friday’s ruling makes gay spouses eligible for tax-free health coverage benefits in all 50 states.

The 2013 Supreme Court ruling had also cleared the way for Social Security spousal benefits, but because the Social Security Administration eligibility is determined by state residence, the SSA is bound to honor the marriage status recognized by states, so the new rules didn’t apply in the 13 states that were gay marriage holdouts. (The Social Security Administration had been encouraging gay couples in those states to apply for benefits anyway, in the event the rules changed.)

“Spousal benefits” means that after a death, the surviving spouse can claim their partner’s benefit in place of her or his own if the check is bigger. The lower-earning spouse can also have his or her benefit increased to 50 percent of the higher-earning spouse while both are alive.

The ruling clears the way for gay couples in all states to file joint tax returns as married. Before today, gay couples could file federal returns as married (again, since 2013), but rules varied wildly on state taxes. (If you are brave, visit this page and try to digest the author’s impressive chart.)

So taxes will be simpler. That might not be a reason to celebrate, however. Many couples who wed are unpleasantly surprised by the marriage penalty. It impacts couples where one partner earns considerably more than the other, lifting the lower-paid partner into a higher tax bracket.

It’s no small concern. Back in 2004 (OK, admittedly it’s old, but it provides some guidance), the Congressional Budget Office looked at the revenue impact of legalizing gay marriage. While a total of 1,138 potentially expensive federal benefits would be newly eligible to gay couples, the added tax collected via the marriage penalty would more than cover the cost. Back then, the CBO estimated that legalizing gay marriage would actually add $700 million annually to federal coffers.

Finally, Friday’s ruling clears up confusion over death taxes, too. Gay couples have been exempt from federal death taxes since 2013 — all assets could be transferred to a surviving spouse tax free. State death taxes, which are usually a bigger concern because they kick in at lower asset levels, were another matter, however. Gay couples had faced added tax liability in states where their marriages weren’t recognized; they are now on equal footing with opposite-sex couples.

Significantly, the ruling removed ambiguity about what tax and financial rules govern gay couples. Previously, couples who were married in a state that recognized gay marriage could end up with different rights when moving to, or even traveling within, a state that did not.

Be sure to consult a professional if you have any questions about your tax situation, particularly when it comes to estate planning.

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