The Supreme Court’s 2015 decision legalizing same-sex marriage in all 50 states was undoubtedly a watershed moment in American society. It also had some major practical implications for gay and lesbian couples, including the ability to file federal taxes using the “married” designation.
This was good news for most couples, who will see a lower tax bill as a result. But those on the extreme ends of the income spectrum should beware: Their liability may actually go up once they tie the knot.
The Marriage Bonus
Prior to 2013, partners in a same-sex union had to file separate 1040 forms with the IRS, designating each as single (though, if they had a dependent, one of them could qualify for “head of household” status). But in 2013, the IRS ruled gay and lesbian couples could submit a federal joint tax return instead. Now that gay marriage is a legal nationwide, the number of couples who file returns together is only going to increase.
What effect is this going to have on their 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 returns in 2014, their tax bills together would total $14,226. That’s almost exactly what they would have paid 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’re able to average out their earnings. With our progressive tax code, that’s often enough to put the bigger 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, they’d collectively owe $15,913 to Uncle Sam. But because they complete a joint return, they only have to pay $14,219. That’s a savings of nearly $1,700, 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 actually have the opposite effect: Two high-income earners who make similar salaries can sometimes get bumped into a higher tax bracket. And 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 scale may also be penalized by the IRS. That’s because adding up both spouse’s incomes could disqualify them from the earned income tax credit (EIC), which is geared toward lower-income families. Here too, the penalty tends to occur when couples make roughly the same amount of money.
Figure 1. Most newlyweds, if anything, will receive a 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.
Source: The Tax Foundation
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 extra incentive to file a joint return. For example, it’s the only way they can claim a credit or exclusion on expenses incurred when adopting a child together. And it’s the only approach that allows taxpayers to obtain the child and dependent care tax credit. 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, both of which help alleviate the cost of higher education.
And don't forget the cost of filing itself. If you're using an accountant or another tax professional, you only have to pay for the preparation of one tax form instead of two.
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. Since the IRS only allows you to exclude health care costs that exceed 10% of your adjusted gross income, qualifying for the deduction would obviously be easier with only one individual's income.
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
Wedded 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.