Celebrate your marriage and familiarize yourself with the tax tips gay couples need today.
NurPhoto via Getty Images
Two of our good friends just got married and of course asked me what this means for their taxes as a gay couple. While I’m a big fan of equality between women and men, I don’t like all of the penalties for marriage in our tax code. Many of these punishments are particularly burdensome for high-income gay couples.
The Internal Revenue Service (IRS) has postponed the tax deadline for 2021. Please do not wait until 11:47 PM on May 17th to request a referral to a great tax professional. If you do, you risk getting shocked by a surprisingly large bill. This also increases your chances of missing out on strategies to lower your taxes owed and greatly increases the chances of a mistake in your tax returns. Trust me, paying more in taxes than you owe, or paying interest and penalties, is nobody’s idea of a gay old days.
From your household to mine, here are a few things you should be doing now to be taxable this season and beyond.
Make a financial appointment with your partner or spouse to get on the same side financially … [+]
Getting on the same side financially
Marriage equality has forced LGBTQ married couples to discuss finances at least once a year. You might call this an odd wedding gift from the IRS. When same-sex marriage was banned, I knew many couples who didn’t talk about money other than how to split the split bills like a mortgage or a cable.
To pay the lowest amount of tax over time, gay couples must act as a team. To do this, LGBTQ couples need to talk about money, talk openly about money, and often talk about money. Talking about money and taxes might not be fun, but I’ll tell you, big tax bills aren’t fun either.
Filing taxes is stressful and a significant butt pain regardless of your sexual orientation. But when it comes to tax liabilities for same-sex couples, ignorance is definitely out of luck. Letting the money do the talking or attending a financial evening is much better than a surprise tax bill in the tax season. (Taxes are now due for 2020 on May 17, 2021.)
Allow some time with your significant other to sit down nonstop and share your favorite cocktail or nice bottle of wine (maybe two, depending on how serious the conversation may be). Discuss your short and long term financial goals. Take a look at where you are financially today, both as an individual and as a couple. Maybe you want to plan an early and fabulous retirement?
During the tax season, gather your tax documents and schedule an appointment with your wonderful CPA or schedule a session to do your own TurboTax data entry yourself. And if the dog happened to eat some of your tax forms (I know, I know it happens), don’t ignore it until May 17th. Do what you have to to get copies now. Hopefully you are working with a fabulous gay finance planner who has helped you proactive tax planning all year round so you don’t get any nasty surprises when filing your taxes.
The “marriage penalty” is severe for many gay couples
As a happily married gay man, I can tell you that the marriage penalty can be harsh for high-income LGBT couples. A large part of the tax code is intended to benefit a nuclear family in which a spouse stays at home and raises several children. Yes, I am aware that many same-sex couples have children, but parenting is still less common in the gay community.
Homosexual marriage penalty tax brackets
Double income and no children can be tax nightmares, especially for those earning a salary. A single person would enter the highest federal tax bracket (37% in 2021) on an income of $ 518,401. In contrast, a married couple with an income of $ 622,051 would enter this tax bracket. Depending on how your income is divided, most high-income gay couples pay more federal income taxes than married or unmarried couples.
Most gay, high-income couples pay more federal income taxes than married or single couples.
Homosexual 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. As a financial planner based in Los Angeles and Palm Springs, I tell you this is a big deal for many of my clients who are gay couples.
The good news is that there is no marriage penalty for selling your home. You can exclude $ 250,000 winnings if you are single and US $ 500,000 winnings as a married couple. For many gay couples who live in expensive neighborhoods, this benefit can mean huge tax savings.
SALT CAP marriage penalty
One of the worst provisions for LGBT couples in the Tax Cut and Employment Act (TCJA) of 2017 is the US $ 10,000 State and Local Tax Limit (SALT). This cap does not matter whether you are married or single. Basically, a married couple has half the SALT limit that two single people would have.
Now that you’re married, some tax deductions that may not have worked in the past may make sense. On the other hand, much of your income can end up in higher tax brackets when your income is combined. Your new higher combined income level may also eliminate some tax deductions that you were previously entitled to.
Saving for the future together
Do you dream of being financially independent? Do you find it attractive to pay less tax? Would you like to retire comfortably or maybe retire early? If you answered yes to any (or all) of these questions, 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, which will help you lower your overall tax burden each year. Plan these posts together. If one spouse earns significantly more than the other, it can be useful to help the lower-income spouse contribute more to their retirement accounts. In some cases, a husband can deposit almost 100% of his income into a retirement account. This is done in order to lower the total household income.
I’m sure you’d rather write a check to yourself than to the IRS. You have until tax time to fully fund an IRA or Roth IRA if you qualify for 2020. This can be another $ 6,000 each, $ 12,000 each for you as a couple or $ 7,000 / $ 14,000 for gay couples 50 and over. If a spouse is not working, gay couples can now use a spouse IRA, further reducing their tax burdens.
For self-employed or entrepreneurs, you can still open and finance a SEP-IRA for 2020. This could allow contributions of $ 57,000 each for 2020. Looking ahead to 2021 and beyond, those earning $ 280,000 or more should consider combining a 401 (k) plan with a Cash Balance retirement plan. This could allow you to protect hundreds of thousands of dollars from taxes each year.
Give your investment portfolio a new touch
Do you want to improve your investment returns without taking additional investment risk? Look for tax savings in your portfolio. Ask your gay finance planner if your non-retirement accounts offer tax-saving opportunities. If this person is old-fashioned and not doing a tax loss harvest, it may be time to leave your stockbroker (who probably calls himself a “financial advisor”) and work with a fabulous financial planner. This fabulous financial planner should be CFP® (Certified Financial Planner ™) certified.
Harvesting tax losses can reduce your taxable income by $ 3,000 per year or more as you offset other realized short-term capital gains. In the long term, it is estimated that proactive tax loss harvesting can potentially (average) add 1.75 to 2% per year to your net return on investment. As you increase your returns, it will be easier for you to achieve your financial goals. A joint investment can also help lower the fees and costs associated with the investment.
LOS ANGELES, CA – MAY 26: Trainer Cara Castronuova (C) joins David Rae the Fun Financial Planner … [+]
Receive tax savings for your gay philanthropy
Did you make a spring cleaning donation to Out of Closet? You did something good and now you might get a nice tax deduction as long as you got a receipt on the donation point. Use a check or credit card when donating cash to ensure you have simple evidence of your generosity in case the IRS questions your contributions. You will be surprised how all these donations to AIDS / LifeCycle and other charities add up. Taken together, they can mean significant tax savings. Speaking of AIDS / LifeCycle (7x drivers here), you can also get a tax deduction for your volunteer or fundraising expenses.
In a typical year, taxpayers would have to enlist to receive a deduction for charitable giving. In 2020 and 2021, you can donate $ 300 each to charity and receive a tax break even if you take the standard withholding.
A couple who file taxes together is married. Whether gay, straight or otherwise, tax time is not a sexy time. But if you make smart money movements and minimize your tax bill, you can get that next exotic vacation sooner.