IRS Recognizes Same-Sex Marriage

By: Timothy P. Flynn

Yesterday, in the wake of the momentous SCOTUS decision in June striking down DOMA as unconstitutional, the all-powerful Internal Revenue Service formally announced recognition of same-sex marriages for all income, gift and estate tax purposes.  While same-sex couples must be legally married, they do not need to reside in a state that recognizes such marriages at the time of the tax filing.

In announcing the new IRS ruling, the Department of Treasury stated:

Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

The IRS also made clear, however, that same-sex unions, domestic partnerships, or other similar formal relationships will not be recognized for tax purposes.

One immediate benefit of the new policy is that legally married same-sex couples can seek tax refunds by filing amended returns for the years 2010, 2011, and 2012.  Additionally, empolyees who are in a legally recognized same-sex marriage that purchased spousal health insurance coverage from their employers can now exclude the insurance premiums from their taxable income.

The policy ruling certainly provides clarity on fiscal issues that have plagued same-sex marriages for decades. Treasury's press release provides coherent tax filing guidance for contributing tax payers that happen to be in same-sex marriages; now such couples can attain the benefits and protections to which every tax-paying citizen is entitled.

To date, 12 states recognize such marriages with several more that appear to be on the way.  While most state legislatures are getting around to addressing the issue of same-sex marriage, either through constitutional amendments banning such marriages, or through legislation recognizing them, New Mexico is addressing the issue through its judges on a county-by-county basis.  This will be the topic of the next Law Blogger post.

Refunds:
If you wish to apply for an income tax refund, use IRS Form 1040X Amended Individual Income Tax Return; refunds from estate or gift tax payments; use Form 843 Claim for Refund and Request for Abatement.  Good luck.

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Posted in: income tax,IRS,same-sex marriage,SCOTUS

Ten Tips for Social Security Planning

We here at the Law Blogger are quietly aging along with the rest of our fellow Baby Boomer generation.  A good chunk of this generation is slipping into retirement mode; slowly, but as surely as ever.

Here are some things to keep in mind as you approach the age where certain decisions need to be made; and elections need to be taken relative to the mighty Social Security Administration.

Many folks are faced with a bewildering array of options regarding their social security benefit.  When should  you start taking the benefit?  At the earliest possible age of 62; or should you wait [can you afford to wait] until age 70?

These tips are merely general principles, not intended as specific legal advice.  Here are some things to consider:

1.  Spousal Benefits.  If you are married, and at full retirement age [66], you and your spouse, but not both, can elect to receive a spousal benefit while deferring on your retirement benefits, thereby enabling those retirement benefits to grow.  If you are the low-earning spouse, however, it could make more sense to take your benefit at the earlier age of 62, then switch to your [presumably higher] spousal benefit upon reaching full retirement age.

In general, there is no advantage to waiting to start collecting either spousal benefits or survivor benefits after you reach your full retirement age.

2.  "Start Stop Start" Strategy.  Complicated, but worth it, this strategy involves electing to take your social security benefit at an early age, say 62, then suspending the benefit at the full retirement age of 66, if you can afford to do so.  Then, at age 70, you start the benefits back up, taking advantage of a much higher [over 30% higher] monthly benefit checks for the balance of your life.

3.  One-Year Repay Option.  This one is interesting.  If you elect to begin taking your benefit, but later decide it was not the right move, you have one year to pay back all the benefits you received.  Then you can re-apply for [higher] benefits at a later point in time.  

4.  Working Into Your 60s.  If you are blessed with good health, and are fortunate enough to be in a profession or job you can handle deep into your 60s, the result will be a significantly higher social security benefit when you finally do hang up the cleats.  This benefit will also accrue to any spousal and child benefits; so your family will benefit as well.  If you opt to receive benefits at an early age [62], you could be locking in on a permanently lower benefit.

5.  Divorced?  Depending on the length of your marriage, you or your ex-spouse may be able to file for benefits based on each other's work histories.  This is beneficial for the divorcee that was married to a high earner.

6.  Federal Income Tax Exposure.  When it comes to calculating your income for tax purposes, disbursements from a Roth IRA are not counted [because you already paid the taxes], but withdraws from a regular IRA, 401(k) or 403(b) are included as income.  Therefore, it may make sense to stage your withdraws on these accounts, taking disbursements from the tax deferred accounts prior to your social security election.  Also, as a general principle, it would make sense to deplete your tax-deferred accounts first.

7.  Survivor Benefit Election.  Widowed?  Some folks will want to elect to receive their survivor benefits at age 60, and to take their retirement benefit after full retirement; others will benefit by electing to take their retirement benefit at age 62, and deferring the survivor benefit until full retirement age.  The difference depends on individual circumstances and the projected benefits.  A careful calculation is needed here and a professional should be consulted in most cases.  The differences in strategy could be significant.

8.  Beware of the SSA's Benefit Calculator.  The SSA's on-line benefit calculator does not adequately handle spousal, divorcee, child, mother, father, widow or widower benefits.  Because the benefits calculator does not factor-in wage growth or inflation, a projected benefit output for a younger worker performing a calculation will be distorted; the worker's actual benefit could be much less than anticipated.  The best practice is not to rely on these calculations as accurate benchmarks.

9.  Children's Survivor Benefits.  Provided they are under the age of 18 [age 19 if still in high school], your children can receive a survivor benefit from your deceased spouse, or ex-spouse.

10.  Enjoy Your Retirement!  This tip is the most important in this  post.  You have worked your entire life; now it's time to take your foot off the gas and cost a bit; take a look at the scenery.  By all means take care of your family, but remember that you cannot take it with you.  So be sure to spend at least a portion of your retirement on yourself.

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Posted in: divorce,estate planning,income tax,lawyer,retirement,Roth IRA,Social Security,spousal benefit