Obviously, I am a huge fan of marriage equality, but I don’t love all the marriage penalties in our tax code. Many of these penalties are especially onerous for high-earning same-sex couples. From my household to yours, here are a few things you should do now to be tax-wise this season and beyond.
Get on The Same Page Financially
Marriage equality has forced LGBTQ married couples to discuss finances at least once per year. You could call this a weird wedding gift from the IRS. Back when same-sex marriage was banned, I knew many couples who did not talk about money beyond how to split the shared bills like a mortgage or cable.
To pay the least amount of taxes over time, gay couples must function as a team. To do this, LGBTQ couples must talk about money, talk openly about money, and talk often about money. Talking about money and taxes may not be fun, but let me tell you, large tax bills are not fun either.
The ‘Marriage Penalty’ Is Rough for Many Gay Couples – Here are 3 examples:
As a happily married gay man, I can tell you that the marriage penalty can be rough for high-earning LGBT couples. Much of the tax code is designed to benefit a 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 Marriage Penalty Tax Brackets – Double incomes and no kids can be tax nightmares, especially for those who earn a salary. A single person would enter the highest federal tax bracket (37% in 2021) at an income of $518,401. In contrast, a married couple enters that tax bracket at $622,051 of income. Depending on how your income is split, most gay high-earning couples will pay more federal income taxes as married versus single.
Gay Marriage Penalty for Real Estate – Many real estate tax breaks are the same whether you are married or single. The mortgage deduction is $750,000, whether you are single or married. 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 – One of the worst provisions for LGBT couples in the 2017 Tax Cuts and Jobs Act (TCJA) is the $10,000 state and local tax (SALT) cap. This 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.
Save For the Future Together
Saving for retirement is a must. The money either of you contributes to a 401(k) or an IRA is excluded from your taxable income, helping you reduce your overall tax bill each year. Plan these contributions together. If one spouse makes substantially more than the other, it may make sense to help the lower-earning spouse contribute more to his or her retirement accounts.
You have until tax time to fully fund an IRA or Roth IRA. That can be another $6,000 deduction, each, $12,000 for you as a couple, or $7,000/$14,000 for those gay couples who are 50 years of age or older. If one spouse does not work, gay couples can now also take advantage of a spousal IRA, further lowering their tax bills.
For those who are self-employed or business owners, you can open and fund a SEP-IRA until the business tax return is due – including extensions. This could allow contributions as large as $57,000, each, for 2020. Looking forward to 2021 and beyond, 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.
Get Tax Savings for Your Gay Philanthropy
Did you make a spring-cleaning donation to Out of Closet? You’ve done some good and now, you may get a nice tax deduction as long as you received a receipt at the donation site. When donating cash, use a check or credit card to ensure you have easy proof of your generosity in case the IRS questions your contributions. You may be surprised how all those donations add up. As they add up, they can mean substantial tax savings. You can also get a tax deduction for your expenses incurred volunteering or fundraising.
Whether gay, straight, or otherwise a couple that files taxes together is married and making smart money moves is a start to minimizing your tax liability.
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