Federal Marriage Benefits? Not for Everyone
Like other married couples, same-sex couples are about to learn that federal benefits for being married might not be all they’re cracked up to be.
Social Security benefits for spouses can be generous, but only for couples with big disparities in their incomes. Taxes are a decidedly mixed bag, and there are still a lot of unanswered questions for the Internal Revenue Service.
Many middle-income couples should get welcome tax breaks now that they can change their filing status from "single" to "married filing jointly." The biggest benefits will go to couples in which one spouse makes more money than the other.
But those at the top and bottom of the income scale could face significant tax increases.
High-income taxpayers could feel the pinch because the tax code still contains substantial marriage penalties for couples with higher incomes. Low-income taxpayers could lose benefits that target the working poor, such as the earned income tax credit, if they get married and their spouse’s income disqualifies them.
Low-income parents also could lose other government benefits such as Medicaid, the health insurance program for the poor, if they get married and their spouse’s income pushes them above certain limits.
"The poor gay couples, particularly if they’re raising children, are going to face the same huge penalty structure that’s now faced by low-income households in general," said Eugene Steuerle, a former Treasury official who is now a fellow at the Urban Institute.
"In that case, they may have won the court battle but are still stuck in a social structure where the government basically tells them, do not marry or you’re going to lose a lot of money," Steuerle said.
The Supreme Court on Wednesday struck down parts of a federal law that denied government benefits to same-sex couples, even if they were married in states that recognize same-sex marriages.
In 2004, the nonpartisan Congressional Budget Office found 1,138 provisions in federal law in which marriage was a factor. Some were obscure, like being eligible to represent your spouse in negotiations over surface mine leases with the Interior Department.
Among the biggest were spousal and survivor benefits for Social Security. Social Security was designed to protect workers and their spouses even if the spouse didn’t work. Under the program, if one spouse works and the other doesn’t, the nonworking spouse can get retirement benefits simply by being married to the worker.
And if the worker dies first, the nonworking spouse gets 100 percent of the worker’s retirement benefits.
Nearly 7 million spouses and surviving spouses get Social Security benefits, according to agency data. Those benefits should soon be available to same-sex married couples.
Social Security was designed "at a time when they had this very stereotypical view of the family," Steuerle said. "They wanted the spouse to have the same benefit as the worker, if the worker died."
The benefits disappear, however, if both spouses work and earn about the same amount of money over their lifetimes. In this case, both spouses simply get the benefits they earned by working and paying into the system.
The Congressional Budget Office tried to estimate the effect on the federal budget of legalizing same-sex marriage in every state. On balance, the study said benefits and penalties would come close to equaling out and have relatively little effect on the federal budget.
Tax revenues would actually increase, but not by much - less than one-tenth of 1 percent.
For same-sex couples, like all couples, how marriage affects your tax bill depends on a lot of factors.
Consider an unmarried couple with no children. One partner makes $70,000 and the other makes $30,000. They would pay a total of $13,483 in federal income taxes if they each take the standard deduction and file as single adults, according to an analysis by The Tax Institute at H&R Block.
If that same couple were married, with the same combined income of $100,000, their federal income tax bill would decrease by $1,625.
That’s because joint filers combine their incomes, allowing higher-paid spouses to shift some of their income into lower tax brackets, said Jackie Perlman, principal research analyst at The Tax Institute.
But those benefits disappear as taxpayers make more money because of the way the income tax brackets are structured, Perlman said.
For example, give that same unmarried couple a hefty raise. Now, one partner makes $225,000 and the other makes $75,000. Their combined tax bill, if they file as single adults: $71,861.
If they were married and filed a joint return, with the same $300,000 in combined income, their tax bill would jump by $5,714, according to the H&R Block analysis.
Some of the biggest tax savings will go to same-sex couples in which one partner relies on the other for employer-provided health insurance,
By law, employer-provided health insurance is tax-free for the vast majority of workers, married spouses and dependent children. But if a worker’s unmarried partner is covered, those benefits, which can be worth thousands of dollars a year, are taxed.
Some wealthy same-sex couples could do well, too, if one spouse inherits a lot of money from the other. That was the central issue in the Supreme Court case that struck down the federal Defense of Marriage Act, or DOMA.
But the case that doomed DOMA was uncommon. Only the very rich pay federal estate taxes - less than two-tenths of 1 percent of all estates, according to the Tax Policy Center. That’s because estates of less than $5 million are exempt, and married couples can exempt estates as large as $10 million.
In the Supreme Court case, Edith Windsor of New York sued to challenge a $363,000 federal estate tax bill after her partner of 44 years died in 2009. Under federal law, married couples can inherit unlimited amounts of money from their spouses, tax-free.
In 2009, Windsor had to pay federal taxes on the portion of the estate above $3.5 million - an exemption that has since grown to more than $5 million - because the federal government didn’t recognize her marriage. Because of the court’s ruling, she now gets the entire inheritance, free of federal estate taxes.
The court’s decision, however, left many questions unanswered. For example, taxpayers can generally go back three years to amend federal tax returns. If same-sex couples have been legally married for three years, can they amend past returns and get refunds?
"That is a great question, and it’s one that is being asked all over the country," Perlman said.
Also, what if you were married in a state that recognizes same-sex marriages but now live in a state that does not? Do you file your federal taxes as a married couple and your state taxes as single individuals?
Stay tuned, says the IRS.
"We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act," the agency said in a statement. "We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future."