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From our “Ask a Question” Mailbag: Are there tax implications to same-sex marriage in Pennsylvania?
Governor Tom Corbett’s announcement in May of 2014 that he will not pursue an appeal of U.S. District Judge John Jones’ decision in Whitewood v. Wolf means that same-sex marriage is here to stay in Pennsylvania. This means a same-sex marriage will result in the same tax treatment both with the IRS and with the Pennsylvania Department of Revenue. Equality is finally here, but some tax aspects of the equal treatment are advantageous and some are disadvantageous.
Marriage is supposed to be for love and planning the wedding can be exciting, but take a few minutes and think about the less-fun aspects of your upcoming marriage such as the income tax ramifications. By spending some time thinking through various tax implications you just might have a happier …and more profitable… marriage.
Tax Advantages of Marriage:
1. The Marriage Bonus
A married same-sex couple may file joint federal income tax return or they can choose to file separately. If there is one person in the marriage that earns much more than the other spouse then filing a joint return often results in a reduced total income tax due for the married couple. The combined return allows more of the total income to be taxed at a lower rate.
2. Receiving Your Spouses’ Tax-Free Employer and Government Benefits
Before being married, you were likely not eligible for your spouse’s tax-free employee benefits such as medical insurance, be eligible for benefiting from your spouse’ social security payments or veteran’s benefits. Now same-sex couples in Pennsylvania are eligible for all of these benefits. Your spouse can check with Human Resources, Social Security and the VA to discovery what tax-free benefits your marriage might bring.
3. The Ability to Inherit Qualified Plans Tax Free and Unliquidated
Qualified plans, such as IRAs, 401ks, TIAA-CREF and 403bs are arrangements where you can place pretax income into a program where the assets grow tax-deferred. At death, in most cases the assets pass to a beneficiary who has to pay inheritance and estate taxes on the total amount and must either liquidate the IRA and pay all the income tax due, or at least elect to start taking the assets out a little at a time starting the year after your death.
But, if the person who inherits your plan is your surviving spouse, there is no estate or inheritance taxes due and the surviving spouse can roll over the qualified plan into the surviving spouse’s own IRA. The surviving spouse can then put off taking any distributions until the year following when he or she turns 70½. This is a large advantage for your surviving spouse if you happen to have a large 410k or IRA. The tax savings can be substantial.
4. Avoiding the Pennsylvania Inheritance Tax and the Federal Estate Tax
There is no Pennsylvania Inheritance Tax or Federal Estate Taxes on assets that pass to your surviving spouse. This can be huge tax savings, as a transfer from one person to someone with whom they are not married, but only living together, is subject to a 15% Pennsylvania Inheritance Tax and if the estate is large enough, a 40% Federal Estate Tax.
5. Portability of the Federal Estate Tax Exemption
Every person at death has the ability to pass on a certain amount, free of the Federal Estate Tax ($5,340,000.00 in 2014) but if you are married you can act as a team and transfer double that amount. As the Federal Estate Tax is a flat, 40% tax, this teamwork can provide huge tax savings if a same-sex married couple plans ahead. Portability allows the surviving spouse to save up any unused Federal Estate Tax Exemption the deceased spouse did not use, even if the surviving spouse took all the inheritance into his or her name. This substantial tax savings is only available to married couples.
6. Unlimited Gifts Without Taxation
To stop taxpayers from giving away their assets to avoid the Federal Estate Tax, Congress created the Federal Gift Tax. Transfers between spouses are not subject to the Federal Gift Tax. In the case where one spouse has an estate substantially larger than the other spouse, this ability to make tax-free transfers to the same-sex spouse can provide substantial asset protection and eventually Estate and Inheritance Tax savings.
7. Sharing Annual Gifts
While the Federal Gift Tax limits your Annual Gift Tax exclusion ($14,000.00 per recipient in 2014), if you are a married same-sex couple you can borrow your spouse’s ability to make the recipient an annual tax-free gift resulting in your being able to double your gift tax-free transfers. For a same-sex spouse whose goal is to reduce the taxable estate, this provides an enormous advantage.
Tax Disadvantage of Marriage:
1. The Marriage Penalty
Like married couples before Whitewood v. Wolf, LGBT same-sex married couples who are both affluent will end up paying a larger federal income tax bill after combining their incomes. For the wealthy, a same-sex marriage can actually cost them more in income taxes than staying single.
While taxes are not often the deciding factor on whether a person marries or not, having a good understanding of the tax changes that the marriage will bring can at least prepare you for both the “better and worse.”
In Conclusion: Estate Planning Related Taxes and Same-Sex Marriage in Pennsylvania
I hope that this article was helpful in explaining the tax implications of same-sex marriage in Pennsylvania. Further, I included links to even more detailed information on my website so you can learn more. Therefore, please contact me and let me know how I did. Certainly, your comments and questions are welcome!
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Peter Klenk is the founding member of Klenk Law, a seven attorney boutique estate planning law firm. We serve clients in Pennsylvania, New Jersey, New York, Minnesota and Florida. Peter Klenk received his Masters in Taxation LL.M. from NYU Law School and his J.D. from the University of Minnesota Law School. He served his country in the Navy JAGC during Desert Storm. Easy to talk to, feel free to call Peter for an appointment. We will make the process as easy as possible!
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