As a gay financial planner, I am fortunate to offer financial planning guidance to many LGBT couples. Achieving marriage equality has been great for the LGBT community, in my opinion. From a tax planning standpoint, getting legally married may greatly increase the tax bills for gay and lesbian married couples. The US tax code is not particularly friendly to couples where both spouses work, have high incomes in high cost-of-living areas (or high tax states), without children.
With the various marriage penalties in the tax code, tax planning is imperative for middle-to-high-income LGBT couples. Paying more in taxes than is necessary is not fun. Similarly, getting hit with a surprise tax bill is a great way to ruin your day.
From my household to yours, here are a few things you should do now to be tax-wise this season and in the future.
LGBT Couples Need Tax Planning
Many people only think about their taxes when they are forced to by IRS tax filing deadlines, likely just once per year. Before marriage equality, LGBT couples didn’t even have to talk taxes with each other this often. Work with your spouse and proactively plan to minimize your taxes, especially if one or both of you are self-employed, a business owner, or have equity compensation (think stock options, RSUs, etc.).
To help your household pay the least amount of taxes over time, LGBT married couples should function as a team. To do this efficiently, gay couples must talk about money, talk openly about money, and often talk about money. Talking about money and taxes may not be fun, but let me tell you, large tax bills are not fun either. This goes beyond how to split the cable and electric bills.
I can hear you groaning through the computer. I get it. Thinking about taxes once per year is stressful enough. But when it comes to the marriage penalty hitting same-sex couples’ wallets, ignoring your taxes is not blissful. As a little extra motivation, saving money on taxes may be the difference between being able to afford that bucket list gaycation you have been dreaming of or writing a big check to the IRS.
Hopefully, you are working with a fabulous gay financial planner who is helping make this process easier while minimizing your taxes in a fabulously easy manner. Keep reading to see a few of the ways the marriage penalty smacks the finances of gay couples.
The ‘Marriage Penalty’ Is Rough For Many Gay Couples
Over the past 18 years helping gay couples with tax planning and financial planning, I have seen many LGBT couples get slapped with a high tax bill from the marriage penalty. While the marriage penalty can hit all couples, it can be rough for high-earning LGBT couples. Much of the tax code is designed to benefit the Ozzie and Harriet nuclear family, where one spouse stays home and raises multiple children. Yes, I am aware many same-sex couples have children, but parenting is still less common in the gay community. Gay and Lesbian couples are more likely to be double income and tend to live in more expensive parts of town (on average, of course).
LGBT Marriage Penalty Tax Brackets
Two high incomes and no kids can lead to some tax nightmares, especially when the incomes are via salaries (reported on your W-2). It would take an income of $518,401 for a single person to enter the highest federal tax bracket (37% in 2021). In contrast, a married couple enters the highest federal tax bracket at $622,051 of income. Depending on how your income is split, most LGBT high-earning couples will pay more federal income taxes as married versus single.
For those living in high tax states like California, the marriage penalty will likely carry through to your state taxes as well.
Looking ahead, most of the tax proposals from President Biden would exacerbate the marriage penalty for a household with a combined income of more than $450,000. At this point, we are still talking about proposed tax changes, so no need to freak out yet.
LGBT Marriage Penalty When Owning Real Estate
There are a variety of tax benefits and tax deductions for owning real estate. Unfortunately, many real estate tax breaks are the same whether you are married or single. The mortgage deduction is limited to a tax deduction for the interest on a $750,000 mortgage, whether you are single or married. As a financial planner who resides in Los Angeles and Palm Springs, I’ll tell you this is a big deal for many of my clients who are gay couples. The typical home value of homes in West Hollywood is $1,039,419, according to Zillow
The good news is there is not a marriage penalty when you sell your home. You can exclude $250,000 of gains if you are single and $500,000 of gains as a married couple. With many gay couples living in expensive parts of town, this benefit can be a huge tax saver.
SALT CAP Marriage Penalty for LGBT Couples
One of the most glaringly bad provisions for LGBT couples in the 2017 Tax Cuts and Jobs Act (TCJA) is the $10,000 state and local tax (SALT) cap. Thanks, Donald. Since we are talking about the marriage penalty for same-sex couples, the SALT cap is the same whether you are married or single. So essentially, a married couple will have half the SALT cap that two single people would have.
All is not lost when it comes to tax planning for an LGBT couple. There are tax planning opportunities for a married couple that may not have made sense for one or both spouses when they were single. There may be some tax credits that now make sense to capitalize on with your high incomes now combined. Think solar tax credits or credits for buying an electric vehicle. Further, it could make sense for both spouses to increase (or perhaps start) maxing out their retirement account contributions based on their tax bracket as a gay married couple.
Year-End Retirement Account Options for LGBT Couples
Look at a spousal Traditional IRA or spousal ROTH IRA if one of you is a stay-at-home spouse. Or works somewhere that doesn’t offer a retirement plan. This may allow you to add a bit more to your retirement accounts each year.
For those who are self-employed or business owners, you can still open and fund a SEP-IRA or a Solo 401(k) for 2021. This could allow contributions as large as $58,000, each, for 2021. The Solo 401(k) has a similar $58,000 contribution limit but allows for a $6,500 catch-up contribution for business owners over the age of 50. For LGBT business owners looking to maximize their contributions, talk with your LGBT retirement plan expert to help determine which plan will allow you the biggest tax deductions.
Those making $280,000 or more should look at combining a 401(k) plan with a cash balance pension plan. This could allow you to shelter hundreds of thousands of dollars from taxation each year. High-earning gay-owned small businesses could lower their taxable incomes by millions of dollars over the next decade.
A couple that files taxes together is married. Whether gay, straight, or otherwise, tax time is not sexy time. But making smart money moves and minimizing your tax liability could mean you get to take that next exotic vacation sooner. Make sure your tax planning goes beyond just filling in your tax forms once per year.