The Supreme Court’s decision to legalize same-sex marriage in all 50 states in 2015 was undoubtedly a watershed moment in American society. It also had some major practical implications for same-sex couples, including the ability to file federal taxes using the married designation and filing status.
Domestic partnerships and civil unions—although counted as legal relationships that are recognized on the state level—are not marriages and don’t qualify you to file federal taxes as a married couple. This means you can only use the marriage designation for tax filing if you are legally married.
The good news for most married same-sex couples is that they will see a lower tax bill as a result of the Supreme Court’s decision. However, those on the extreme ends of the income spectrum should know that this may not be true for them. Their tax liability may actually go up once they tie the knot.
- Married couples can file federal taxes in only one of two ways—married filing jointly or married filing separately.
- Married couples with a disparity in their incomes will likely reduce the amount of taxes they pay by filing jointly due to the marriage bonus.
- Couples in which both partners are high-income earners may see their tax bill increase if they file jointly, in which case they should file separately.
- On the other hand, low-income earners may also see their tax bill increase if they file jointly, as a result of limited or reduced tax credits for married couples.
People in a same-sex union had to file separate 1040 forms with the Internal Revenue Service (IRS) prior to 2013, designating each as single. If they had a dependent, one partner could qualify for head of household status. But in 2013, the IRS ruled same-sex couples could submit a federal joint tax return instead. Since same-sex marriage became legal nationwide, the number of couples filing returns together has increased. According to the Tax Policy Center, more than 250,000 same-sex couples filed joint tax returns in 2015.
Like other couples, if you're legally married by the end of the tax year, your days of filing as a single person are over. This means you must file a married tax return, either jointly or separately. The only way you can file as single is if you are in a domestic partnership or civil union, or if you're separated by decree of the court—even if you're still not legally divorced.
The Marriage Bonus
What effect does marriage have on a couple's taxes? For newlyweds who make roughly the same amount of money, the difference could be minimal.
Consider a couple in which both spouses earn $45,000 a year in taxable income, or $90,000 total. If they were filing single tax returns for 2019, their tax bills together would total $11,528—provided there are no additional deductions, taxes, or credits and factoring in standard deductions. The effective tax rate per spouse is 12.8% ($11,528 / $90,000) with a marginal tax rate of 22%. The couple would pay $11,523, effectively the same, if they had submitted a joint return after getting hitched.
However, couples with a bigger disparity in wages often receive a marriage bonus because they can average out their earnings. With our progressive tax code, that’s often enough to put the higher income-earner into a lower tax bracket.
Let’s say one spouse has $70,000 of taxable income and the other brings in $20,000. If they file as single taxpayers for 2019, they’d collectively owe $13,473 to Uncle Sam. But if they complete a joint return, they’d only have to pay $11,523. That’s a savings of $1,950, simply because they combine their returns.
The Marriage Penalty
Unfortunately, not everyone benefits at tax time by saying "I do." In some circumstances, married status can have the opposite effect. Two high-income earners who make similar salaries can sometimes get bumped into a higher tax bracket. This is because the 35% federal tax bracket for married couples filing jointly does not begin at twice the income as the same bracket for unmarried individuals. Although the 35% federal income tax rate for the 2020 tax year kicks in for income over $518,400 for singles, it kicks in for income over $622,050 for married couples filing jointly.
If their total income is large enough, wealthier couples could trigger the Medicare surtax instituted in 2013. For married couples filing jointly, that amounts to 0.9% on earnings over $250,000.
The marriage penalty doesn’t only affect the affluent, however. Newlyweds on the opposite end of the income spectrum may also be penalized by the IRS. That’s because adding up both spouse’s incomes could disqualify them from the earned income credit (EIC)—a tax benefit geared toward lower-income families. Here, too, the penalty tends to occur when couples make roughly the same amount of money.
The American Rescue Plan, signed by President Biden on March 11, 2021, includes generous tax breaks to low- and moderate-income people. For 2021 only, the size of the earned-income tax credit will increase for childless households. The maximum credit amount for childless people increases to $1,502, from $543. The age range has also been expanded. People without children will be able to claim the credit beginning at age 19, instead of 25, with the exception of certain full-time students (students between 19 and 24 with at least half a full-time course load are ineligible). The upper age limit, 65, will be eliminated. For single filers, the phaseout percentage is increased to 15.3% and phaseout amounts are increased to $11,610.
Married couples on the low end of the earning spectrum may lose out on qualifying for tax credits if they file jointly.
Source: The Tax Foundation
Figure 1. Most newlyweds, if anything, will experience a marriage bonus by filing as a married taxpayer. However, some low-income and high-income couples can actually incur a marriage penalty if their incomes are similar.
Same-sex couples, like other married taxpayers, can file in one of two ways. They can submit a return as married filing jointly or married filing separately.
Most of the time, experts say, couples benefit by filling out a joint return. They’re able to average out their incomes that way. So if one person makes substantially more than the other, there’s the potential for a tax break. In addition, completing a joint 1040 is usually the best way for married people to lower their taxable income.
Couples who plan on raising a child together have an extra incentive to file a joint return. For example, it’s the only way they can claim a credit or an exclusion on expenses incurred when adopting a child together. And it’s generally the approach that allows taxpayers to obtain the child and dependent care tax credit. (There are some exceptions for couples who are legally separated.) Depending on the couple’s income, they may be able to claim a credit up to 35% of their qualifying expenditures.
Other credits available include the aforementioned EIC and the American opportunity and lifetime learning credits (LLCs), both of which help alleviate the cost of higher education.
That’s not to say there’s never a reason for same-sex spouses to file separately. For example, say one spouse wants to deduct some hefty out-of-pocket medical expenses. As the IRS only allows you to exclude healthcare costs that exceed 7.5% (formerly 10% in tax years 2013- 2016) of your adjusted gross income, qualifying for the deduction would obviously be easier with only one individual’s income.
Please note that the source of funds used to pay medical expenses can be highly important when calculating medical deductions. According to the IRS, "if you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each actually paid. Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you, unless you can show otherwise."
Also, when you file a joint return you’re responsible for your spouse’s tax liability. So you could be on the hook for any missed payments, under-reporting errors, or penalties—even if the other person earned all or most of the money that year.
The Bottom Line
Married same-sex couples now face the dilemma other spouses face: Whether to file their 1040 forms jointly or separately. While a combined return offers a lower tax bill in most cases, it doesn’t hurt to run the numbers both ways before submitting your form to the IRS.
It’s also useful to note that the IRS allows you to file amended returns for up to three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later. So if you filed in a way that was not financially to your advantage, you might still be able to file an amended return and reap the financial rewards due you.