I was chatting with my neighbor this weekend, as we watched our children playing together, she brought up the subject of the Supreme Court hearing oral arguments for and against marriage equality today. We discussed the odds that the court will ultimately overturn the Defense of Marriage Act and California's Proposition 8 in the bargain. "If they do overturn DOMA," she said, "I think we should hold a 'filing jointly' party next April."
We both laughed, even though we both knew how serious her unspoken point was. If the Court overturns DOMA, it will effectively repeal one of the most expensive and least discussed taxes in America: The Gay Tax.
There’s no gay marriage on form 1040.
Same-sex couples can legally wed in nine states and the District of Columbia. This week, 80 prominent Republicans urged the Supreme Court to make it the law of the land. But come tax time, married gay couples have few rights and more headaches.
…. Much of the issues stem from the fact that gay couples cannot file jointly on their federal tax returns. This makes tax preparation more tedious for those living in states that recognize gay marriages. Same-sex couples may have to prepare as many as four tax returns in order to maximize their tax benefits, pros say. Each spouse needs to file his or her federal return as a single person. And couples who want to file married at the state level have to prepare a joint federal return — which never gets filed — in order to have all the information they need, experts say. “It’s a burden, and it takes extra costs,” says Alison Flores, an attorney and analyst with the Tax Institute at H&R Block.
Not being able to file jointly also means that many same-sex couples face larger tax bills than straight couples, says Kenneth Weissenberg, a partner at accounting firm EisnerAmper who estimates he and his husband Brian Sheerin paid an additional $5,000 in taxes last year because they couldn’t file as a married couple. Many married couples owe less in taxes when they file their returns jointly than they would as individuals, especially when one spouse earns more than the other, says Weissenberg.
It's a subject my husband and I have discussed many times, most recently after Maryland voters made marriage equality the law of the state. For more than ten years, we've filed our taxes separately. Maryland now allows gay couples to file joint state tax returns, but we're waiting until next year because our tax preparation was already underway when we got the news.
We'll file out state taxes jointly next year, and we're holding out hope that we'll be able to do the same with our federal taxes, because right now we pay a pretty high tax penalty for being married to each other. Sometimes that tax gets really expensive, for people like 83-year-old Edith Windsor.
There is, though, something distinct about Edith Windsor, the plaintiff in the case challenging the Defense of Marriage Act, and not simply in the almost mesmerizingly romantic aspects of her story—how the night she first danced with Thea Spyer, the woman she would marry, she kept twirling until there were holes in her stockings, and how, forty-four years later, she nursed her as she was dying. Windsor’s biography, but for the same-sex variation, isn’t so different from those of the Justices, or of those in their social and cultural circles. She is eighty-three, three years older than Ginsburg, six years older than Scalia and Kennedy; like Stephen Breyer, who is seventy-four, she was married to a psychologist. She was born in Philadelphia, went to Temple, and then got a graduate degree (in mathematics) from New York University. (In Ginsburg’s case, it was Cornell then Harvard and Columbia; reading Jeffrey Toobin’s profile of Ginsburg in The New Yorker, one can imagine them in the same circles.) Windsor did very well at I.B.M., as an early systems engineer. Her wife died in 2009, the same year as did John O’Connor, whose wife, Sandra Day O’Connor, had, like Windsor, quit a job in which she was a pioneer to care for a spouse with a devastating, chronic illness. (Multiple sclerosis in Spyer’s case, Alzheimer’s in O’Connor’s.)
As I wrote in an earlier post, Windsor had standing to bring the case because she was financially damaged by DOMA. Spyer had left Windsor her shares in the country house and Greenwich Village apartment they’d bought in 1968 and 1975 (each worth much more now), and, because the federal government, unlike the state of New York, doesn’t recognize her marriage, Windsor has to pay three hundred and sixty-three thousand dollars in estate taxes. How many times in their legal careers have the Justices, including the younger ones, told a friend they saw at a dinner party or an older relative who’d been widowed not to worry—that spouses don’t get a tax bill like that? And will it be striking to them that if the widow had been Edith Windsor, they wouldn’t have been able to say so?
There it is. A $363,000 tax bill for being married to another woman. The reason for this is something known as "The Gift Tax," which in this case really should be renamed "The Gay Tax".
Beware the Gift Tax
Heterosexual married couples are exempt from almost all federal taxes that are levied on transfers of property or money between them. Not so for gay and lesbian couples, since their marriage is not recognized by the federal government. This means that same-sex couples must be aware of federal gift tax rules.
What is the gift tax? Every person may give a lifetime total of up to $5.25 million (for 2013) without tax penalty. Once you surpass that limit, all further gifts, and anything you leave at death, are taxed. Annual gifts of $14,000 or less per recipient do not count towards this lifetime total. Heterosexual spouses are exempt from this tax -- they can give any amount to each other and it doesn't count as a gift. But gifts between same-sex couples do not qualify for this exemption. (To learn more about how the gift tax works, see Nolo's article Estate and Gift Tax FAQ.)
Example: How the gift tax works
If Ann and Greg are married, Greg can give Ann $30,000 per year, and this will not count towards Ann's lifetime gift/estate tax exemption. But if Marcia and Mary are married and Marcia gives Mary $30,000 one year, $16,000 of that amount will count against Marcia's lifetime gift total.
How might this affect gay and lesbian couples? If you make taxable gifts of more than $5.25 million, you will have to pay taxes on any future gifts. This tax can be hefty -- nearly 40% of the amount of the gift -- and wealthy same-sex couples may be at risk of having to pay it. You can also rack up the dollar amounts if you put your partner on the title to your home without receiving payment. The federal government considers this to be a gift of half the value of your home, and this amount will count towards your lifetime gift total.
That's not all. You don't have to be wealthy to get hit with the Gay Tax. The biggest tax hit can come where you least expect it: health insurance.
And for some same-sex couples, the biggest tax hit happens in an area most married couples don’t yet associate with Uncle Sam: health benefits. While more employers are allowing same-sex spouses to be added to their employees’ health plans, the perk is often considered a taxable benefit under federal law, costing those couples an additional $1,069 a year in taxes, according to a 2007 report by the Center for American Progress, a progressive think tank based in Washington. Workers also normally can’t use pre-tax dollars to pay for a spouse’s coverage. Some companies try to offset those higher taxes by increasing pay for affected workers, but those employees are also subject to higher taxes on that compensation, says Moulton.
That's our family's reality. Right now my husband and I each have health insurance through our employers. The kids are carried on his health insurance, and as a result he pays a premium for family coverage. That means he is effectively paying for health insurance for me. But it's health insurance that I can't touch, because the minute I do it becomes a taxable gift. Thus, I get health insurance separately through my employer, and the premium is deducted from my salary. So, we're basically paying for my health insurance twice, and if I used the health insurance provided through my husband's employer we'd get hit with a higher tax bill.
But wait, there's more. As Suse Orman pointed out earlier this year, gay couples pay more taxes for fewer rights.
There's another penalty that's even worse. Regardless of the size of their estates, every gay couple is discriminated against when it comes to Social Security benefits.
Married heterosexual couples can maximize their Social Security retirement benefits by taking advantage of the highest-earner's benefit. When both spouses are alive, the lower earner can opt to collect a monthly benefit check that is equal to 50% of his or her spouse's benefit. For many married couples, that 50% spousal benefit is often much higher than what the lower-wage-earning spouse could collect based on his or her own earnings record. Most important, when the high earner dies, the surviving spouse is allowed to collect 100% of the deceased's higher benefit.
Because same-sex marriages aren't recognized on the federal level, gay and lesbian couples are not eligible for Social Security spousal benefits. The lower earner cannot claim any benefits based on the higher earner's benefit. A heterosexual couple married for just a few months is able to collect a federal benefit that same-sex couples who have been together for decades can't. Are we really a nation that says that is fair?
According to that 2007 Center For American Progress study, gay couples pay a grand total of $178 million, and employers pay an additional $57 million in payroll taxes on that taxable income — a penalty, Orman notes, that neither same-sex couples.
It doesn't stop there. As I wrote back in 2006, there's a long list of "gay tax penalties."
Most of the economic and financial issues are things that married heterosexuals don’t have to talk about, or even think about much, because it’s already given. But same-sex couples do have to talk about it, have to negotiate how to get just a few, can’t get most of those benefits, and have to pay more for the few we do get. And in many ways, same-sex couples assume many of the “burdens and obligations” of marriage referred to in the New Jersey decision are actually subsidizing for married heterosexuals the same benefits that are denied to us.
It almost makes marriage seem more like “welfare for heterosexuals” supported by the rest of us; a stipend, if you will, for being “straight.” That’s the part that doesn’t get talked about.
It’s one that either doesn’t get brought up, maybe because people don’t particularly like talking about money, or opponents of marriage equality dismiss support for marriage equality by saying “it’s all about money.”
… There are a host of financial issues that effect same-sex couples differently, and create the “economic and financial inequities” mentioned in the ruling. I listed them before when I asked what rights same-sex couples should have, and here they are again in a nutshell.
- Inheritance rights – Same-sex couples have no automatic rights to inheritance in the absence of a will.
- Family leave – Same-sex couples have no legally protected right to unpaid leave to care for an ill spouse.
- Pensions – Most pension plans only pay survivor benefits to a legal spouse. Same-sex partners get no pension support for surviving partners.
- Nursing homes – Same-sex couples have no legal right to live together in a nursing home and spend their final years together.
- Home protection – The laws that protect married couples from being forced to sell their homes to cover high nursing home bills don’t apply to same-sex couples. A same-sex partner can be forced to sell, and forced out of the home to satisfy nursing home bills if he/she lives in the home but does not own it.
- Retirement savings – Married people can roll over a deceased spouses 401(k) into an IRA without paying taxes. Same-sex partners must withdraw everything, pay income taxes on it, and lose the tax deferral benefits.
- Taxes – Marries spouses may inherit unlimited property from a deceased spouse, tax free. Same-sex partners pay taxes on any amount over set state and federal limits.
- Social Security benefits – Unless you’re married, you get no Social Security from a dead spouse. If you have kids, they will get it and you may be custodian of it until they’re adults.
Now, most of these are issues that no state court or legislature can address, or at least fully address, because they involve federal law. But the argument against many of these benefits for same-sex couples is that many of them can be obtained through the creation of legal documents (i.e. a will, though heterosexual spouses are guaranteed to inherit some percentage of a deceased spouses estate even in the absence of a will.) or through other processes that usually require same sex couples to shell out more money for what married heterosexuals get for free or at significantly less cost. For example, one same-sex partner can purchase health insurance for his/her spouse via an employer’s health plan or another, but the heterosexual in the next cubicle will probably get to add his spouse at little or no additional cost, and the cost of that benefit will be made up in part by the queer in the adjoining cubicle.
That's only a partial list, but add them up — inheritance rights, family leave, pensions, nursing home costs, retirement savings, etc. — and it all adds up to a rather expensive "gay tax," because our families must either pay more than legally married couples would for the same things; or we pay a higher price for inequality, by either suffering the consequences of not having those rights or paying for legal documents that may or may not be recognized, in hopes they might win us one or two of those rights. The legal costs alone would pay for thousands of marriage licenses.
The biggest irony about the "Gay Tax" thus far has been that it's the one tax that Republicans like — so much, in fact, that even GOP deficit hawks like John Boehner will spend $3millon taxpayer dollars to defend.
There are signs that the GOP may be "evolving" on the issue. Conservative Republican Ted Olson is one half of the legal team arguing for marriage equality before the court today. As many as 75 prominent Republicans signed an amicus brief presented to the Court this week, arguing that marriage equality is a civil right. Sen. Rob Portman, recently announced his change of heart on marriage equality, after his son came out.
Those are reasons to hope. On the other hand, marriage equality remains a struggle for the GOP. Most of the prominent GOP supporters of marriage equality are "out-of-office." For every Rob Portman, there's a John Boehner who will "always oppose" marriage equality. For every Ted Olson there's a Republican like CPAC straw poll winner Rand Paul, who'd solve the problem of the Gay Tax with a tax cut.
Rand Paul appeared on Fox News Sunday with Chris Wallace who asked him about the Defense of Marriage Act (DOMA) case that will be argued in the Supreme Court this week. Rand Paul said that marriage should be a state issue and that the federal government should not be promoting something he doesn’t believe in.
Paul believes that by issuing a flat tax, you get rid of the benefits that are available to heterosexual couples, thus making the tax system equal. Gay Americans rejoice! Now, everyone will pay the same tax and nobody needs to be declared equal in the eyes of the law or any of that other messy business.
Rand Paul says he wants the government to make laws more neutral towards the issue of gay marriage. He thinks that if you take the word “marriage” out of tax code, then the federal government never has to deal with the issue of redefining it. Wrong.
Marriage is not just a states issue, no matter how much Rand Paul wants it to be. The institution of marriage is deeply intertwined with the federal government. The federal government looks at marriage licenses for Social Security benefits, citizenship, and for Medicaid/Medicare benefits. Declaring that gay marriage is states rights issue also rejects the argument that is at the core of this debate.
Do we see gay Americans as equals or do we not?
I appreciate that Sen. Paul, like any Republican, wants to lower my taxes; albeit in his own delusional way. But honestly, there's a much simpler way to do it:
Let me and my husband get married, and treat my our marriage the same as our neighbors' marriage.
Repeal the Gay Tax, and not only will we throw a "Filing Jointly" party, but I might even consider in sending Paul an invite.