Taxes are no gayer than marriage, but some people still call it gay marriage. However, with “gay marriage,” gay taxes have become a bit confusing for same-sex couples. Here’s what you should know before filing your gay taxes. Click here if you need quick help with paying your taxes.
A study on gay taxes by Credit Karma
An LGBTQ tax study conducted by Credit Karma found that 35% of same-sex married couples are unsure about their filing status. If you’re among that 35% and you filed as single, head of household or married filing separately, you may not have received all the tax breaks and benefits you deserve.
The good news is, you can file an amended return and get that cashback.
Christina Taylor is the Senior Manager of Tax Operations for Credit Karma, the online platform working to make financial growth possible for everyone. Credit Karma is on a mission to give its 75M members free access to the tools, education, and opportunities necessary for making real, meaningful progress in their financial lives.
Christina joins us to share the findings of the Credit Karma LGBTQ tax study. She explains why tax law is so confusing for same-sex married couples and walks us through the five potential filing statuses.
Christina shares her top takeaways from the study, offering insight around filing jointly, claiming the adoption tax credit, and filing for a medical deduction. Hear Christina’s advice on filing an amended return and how Credit Karma can help you receive all of the tax breaks and benefits available to you!
Listen here to learn more about your gay taxes:
Click here for more information on how Credit Karma can also help you with your credit score.
Gay marriage tax filing: Ways same-sex couples can file taxes
Married filing jointly vs separately
The great news with marriage equality is that legally married gay couples, including those with recognized common-law marriages, can now choose to file joint or separate tax returns. Both have their advantages and disadvantages.
Here’s what you and your spouse should know.
1. Married filing jointly
The advantages of a same-sex couple filing a joint return include more generous tax brackets, a standard deduction that’s twice that of the married filing separately option and more financially friendly tax brackets.
In addition, filing one joint return can save the tax preparer fee of filing two returns for couples who are married and filing separately.
The potential downside is that both spouses incur responsibility for the return’s accuracy and for the entire tax balance due, regardless of amount of their individual incomes. For example, if one spouse earned $75,000, and the other earned $150,000, both are liable for the tax due regardless of whose income (generated it).
2. Married filing separately
With the married filing separately option, each spouse’s deductions and income are recorded on separate returns.
An advantage of filing separately is that each spouse is solely responsible for his/her individual return and any associated tax due. This contrasts with married filing jointly where the return’s accuracy and tax liability are shared.
A downside of filing separately is forgoing many tax breaks given to joint filers, including but not limited to educational tax credits such as the student loan interest deduction, childcare tax credit, and Earned Income Tax Credit.
Marriage bonus vs. marriage penalty for same-sex couples
A marriage penalty or bonus is largely dependent upon the incomes of you and your spouse, the difference between your incomes and how many children you have.
- Couples with like incomes – either low or high, are more apt to incur marriage penalties
- Couples with markedly different incomes are more apt to incur marriage bonuses
- Middle-income couples are more apt to not be affected either way
The marriage penalty
1. Like income, low earners
The earned income tax credit (EITC) may decrease or be non-existent due to marriage increasing the household income of low-earning couples. In that case, a married couple’s after-tax income may be lower than if they remained unmarried.
2. Like income, high earners
Couples whose joint income ranges from $612,350 – $1,020,600 will pay increased taxes upon marriage. This is due to the 37% tax bracket structure that applies for married couples filing jointly.
3. High earners with similar incomes
Couples who jointly earn between $612,350 and $1,020,600 will pay higher taxes if they marry. This is because the 37% federal tax bracket for married couples filing jointly is not twice as large as the tax bracket for unmarried individuals. Although the 37% federal income tax rate kicks in for income over $510,300 for singles, it kicks in for income over $612,350 for married couples filing jointly.
Simply put: a larger portion of a high-earning couple’s income is shoved into the 37% tax bracket if they marry, while more of it stays in the 35% tax bracket if they don’t.
4. Medicare Surtax for high earners
For single taxpayers earning over $200,000 and married taxpayers earning over $250,000 in wages, compensation and self-employment income, a 0.9% Medicare surtax applies. For couples earning between $250,000 to $400,000, a marriage penalty applies as the tax threshold for married couples isn’t double that of singles.
5. Net investment income tax for high earners
The net investment income tax (NIIT) of 3.8% applies to individuals whose modified adjusted gross income (MAGI) exceeds $200,000 if single and if married and filing jointly, $250,000. A marriage penalty applies to couples with total earnings of $250,000 – $400,000. The tax applies only to net investment income, not earned income.
6. High earners with long-term capital gains investments
When a high-earning couple, married filing jointly, earns over $488,850 they incur a marriage penalty of a 20% capital gains tax rate versus the usual 15% rate, on investments held longer than one year.
7. Homeowners with big mortgages
Based on the Tax Cuts and Jobs Act (TCJA) that took effect in 2018, married couples with large mortgages – mortgages over $750,000 – may trigger the marriage penalty.
A same-sex married couple may still claim an itemized deduction on their mortgage interest paid up to $750,000 of debt originated after December 14, 2017, but a mortgage of $750,001 or more may trigger the marriage penalty.
8. State and local residents with high income and high property taxes
Also, per the TCJA, both married couples and singles are capped at $10,000 in itemized deductions for local and state taxes, which includes property and income taxes.
Since July 1st, 2018, as noted by the Tax Foundation, 15 states have applied a marriage penalty as their income tax brackets for married couples filing jointly are not two times that of the single filer brackets:
- New Mexico
- New Jersey
- New York
- North Dakota
- Rhode Island
- South Carolina
Click here for tools and tips to save money if you were unprepared for the marriage penalty and owe more money than you have to Uncle Sam.
The marriage bonus
Married couples filing jointly can receive a 21% bonus on their total income if they have children and those without children can receive an 8% bonus, according to the Tax Foundation. The bonus routinely applies when one spouse’s income is significantly higher.
A couple can benefit from the wider tax bracket applied to married couples filing jointly, as the lower-earning spouse’s earnings doesn’t bump the couple into a higher tax bracket. As a result, a lower tax rate may apply. In addition, the spouse with lower income may receive spousal IRA contributions courtesy of the spouse with higher earnings.
Social Security Spousal and Survivor Benefits for married, same-sex couples
We gained over 1,000 benefits in 2015 with marriage equality. Two crucial benefits include the Social Security Spousal and Survivor Benefits. That’s because the potential lifetime growth on those payouts could provide you or your same-sex spouse over $1,000,000.
The Social Security Benefits pro at MassMutual, David Freitag, joined us on Queer Money® to share these important details.
Hear all about the Social Security Spousal and Survivor Benefits:
There are some situations when individuals, regardless of whether they’re in a same-sex or opposite-sex marriage, become unqualified for a full Spousal or Survival payout on Social Security. David joined us for another episode of Queer Money® to talk about these situations and their risks.
Hear how Social Security Offsets could affect your Spousal or Survivor payout:
If you were unprepared for and are experiencing these Social Security Offsets, click here for 27+ tips to help you through this crisis. Even just doing a couple of these will go a long way.
Common questions about filing gay taxes after gay marriage
1. How does married filing jointly affect student loan payments on an income-based repayment schedule (this can cause the repayment amount required to increase)?
This is critically important to know! Married filing jointly can increase your student loan payments if you’re currently enrolled in an income-based repayment plan.
Generally, in the case of filing a joint federal income tax return, an income-driven repayment plan is based on the joint income of you and your spouse. In contrast, in the case of spouses filing separately, usually the loan payment is based on the income of the spouse with the student loan.
One exception: In the case of Revised Pay As You Earn (REPAYE), loan payment is based on the combined income of your spouse and you irrespective of whether taxes are filed separately or jointly.
All other income-driven repayment options such as Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Income-Based Repayment (IBR) generally consider payment calculations based on how you and your spouse file your federal income tax return.
Income-driven repayment plan comparison – filing jointly vs. separately
The helpful chart below is from Ed Homeroom – The Official Blog of U.S. Department of Education.
|Repayment Plan||Income Considered When Married Filing Jointly||Income Considered When Married Filing Separately|
|Revised Pay As You Earn||Joint Income||Joint Income|
|Pay As You Earn||Joint Income||Individual Income|
|Income-Based Repayment||Joint Income||Individual Income|
|Income-Contingent Repayment||Joint Income||Individual Income|
If you’re not certain as to what choice – filing jointly or separately – will be the most financially beneficial for you and your same-sex spouse, it’s always a good idea to consult a tax professional for their expert advice.
Click here for fast relief for tools and tips if your income-based repayment has gone up because you filed married and jointly.
2. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?
In the case of an individual adopting a child with a same-sex spouse as a second parent or co-parent, the adopting parent may not claim the adoption tax credit for expenses paid in relation to adopting their spouse’s child. Expenses incurred for stepparent or second-parent adoption are not permitted as federal tax return deductions.
3. When are individuals of the same sex lawfully married for federal tax purposes?
The IRS considers state or foreign law in determining whether individuals are legally married. The general rule is that the IRS recognizes the marriage of same-sex spouses that are validly entered within a foreign or domestic jurisdiction that legally authorizes same-sex marriages. The legal recognition stands even if married couples are currently residing in a foreign or domestic jurisdiction that doesn’t validly recognize same-sex marriages.
4. Can gay couples file married-jointly if we’re domestic partners or in a civil union? If so, how?
Nope. Since registered domestic partners are not recognized as married under state law, they aren’t recognized as married for federal tax purposes. Filing a federal return using the married filing jointly or married filing separately is not permitted for registered domestic partners.
5. What are the ways same-sex couples can minimize taxes?
There are a number of easy ways same-sex couples can minimize their taxes and (advantages).
1. Max out employer-sponsored traditional retirement plans
If you aren’t already doing so, maxing out employer-sponsored traditional retirement plans not only decreases your taxes owed but helps to grow additional income for your retirement years.
Hear all the pros and cons of company-sponsored retirement plans on this Queer Money®:
Then, sign up for Blooom here. Blooom will help you pick your 401(k) and 403(b) investments based on your financial goals, risk tolerance and time horizon (when you want to retire and how long you expect to live).
Click here to get your FREE analysis to see what your retirement plan can do for you.
2. Donate more to the LGBTQ community to get an itemized deduction
Be sure to include the amount of the standard deduction and the donation amount needed to qualify for itemized.
Hear how to smartly give to the LGBTQ community on this Queer Money®:
3. Talk with a financial planner about tax-loss harvesting in taxable accounts
If you have taxable investment accounts, it may make sense to consult a financial advisor about tax-loss harvesting.
In short, tax-loss harvesting can reduce your year-end tax liability by selling certain investment assets at a loss. The strategy can be used to offset capital gains resulting from securities sold at a profit. It can also be used to offset non-investment income up to $3,000.
Tax-loss harvesting applies only to taxable investment accounts.
- Invest in your children/niece/nephew’s 529 plans to get state deductions
- Invest in a 529 plan for you/your children/niece/nephew/aunt/uncle to get state deductions
Investing in a 529 plan is a smart way to significantly decrease your taxes in the short and long term. In the short term, many states offer a partial or full tax credit or deduction for state plan contributions with some states permitting you to deduct contributions to any plan.
You’ll also enjoy long term financial advantages of the plan growing federal tax-free and not incurring taxes when the money is used to pay for college, or in some cases kindergarten through 12th-grade tuition at private schools—up to $10,000 per child per year.
See more about 529 Plans and more here:
Then, get your copy of the Money Conscious Student Guide here.
6. How to pay federal taxes as a married, same-sex couple?
How to pay federal taxes
There are several options in paying federal taxes including paying directly from a checking or savings account, credit or debit cards and by installment agreement.
1. Direct pay
With IRS Direct Pay, tax bills can be paid directly from a savings account or checking account with no additional fee. Once payment is completed, taxpayers receive instant confirmation. Payments may be scheduled up to 30 days in advance and can be changed on canceled at least two business days before the scheduled payment date.
2. Debit or credit cards
Taxes may be paid online, by mobile devices, or by phone via debit or credit card online. Convenience fees do apply and vary by card used, although the IRS does not charge a separate fee.
3. Installment agreement
Monthly Installment agreements may be arranged if taxpayers aren’t able to pay their taxes immediately. Prior to applying for a payment agreement, taxpayers are obligated to file required returns.
Applications for installment agreements can be applied for with the Online Payment Agreement tool, which also details additional information about monthly installment agreement eligibility requirements.
4. There’s an app for that
Mobile devices users can access the IRS2Go app to pay by credit or debit card or Direct Pay. IRS2Go, IRS’s official mobile app, may be downloaded from the Apple App Store, Amazon App Store or Google Play.
Click here for helpful tips if you owe more money than you can afford.
7. How to pay state taxes as a married, same-sex couple?
Here’s a handy guide on how to pay your state taxes and a list of state tax deadlines for 2020. If the state taxes you owe are more than you can afford, try one or two of these 27 tips to help you through this crisis.
8. How to pay taxes online?
Taxes may be easily paid here online with a debit or credit card.
9. How to pay taxes with a credit card? Is that a good thing?
Paying taxes by credit card can be done by mobile device, internet or phone no matter if you choose paper file, e-file or are replying to a notice or bill. The IRS utilizes secure and safe commercial/business card networks and standard service providers.
The IRS offers 3 card payment processors with varying interest rates and lets you choose the best option for your payment amount and card type.
Choices include: PayUSAtax at 1.96%, Pay1040 at 1.87% and Official Payments at 1.99%.
Tax debt is one reason why many people find themselves in credit card debt. This can create a cycle that’s hard to break free from. That’s how we can help!
For help paying off your credit card debt, we recommend the Debt Lasso Method over either the Snowball or Avalanche methods. We’re such a fan of it, we recommended it to Good Morning America.
Watch us share the Debt Lasso Method with Good Morning America below:
For help not adding more debt to your credit cards, click this link here.
10. Do you have to pay taxes on stimulus checks?
Stimulus checks are not taxed as, according to the IRS, the payment isn’t considered income. In addition, the check will not impact your income when calculating eligibility for federal benefit or government assistance programs.
This is great news! What’s even better news is that there are more ways to help you during this crisis. Try just one or two of these.
11. When are taxes due?
Although taxes are typically due April 15th of each year, in response to the COVID-19 outbreak, the Internal Revenue Service and Treasury Department have extended this year’s tax return deadline from April 15th to July 15th, 2020.
The deadline was automatically extended for all trusts, corporations, and individual returns, and there’s no need to call the IRS to qualify or file additional forms.
Need to file an extension beyond the July 15th deadline?
If you’re an individual taxpayer and need more time to file after the July 15th deadline, an extension can be requested by filing form 4868 through your tax software, tax professional or by using the Free File link on IRS.gov.
File Form 7004 for a business needing additional time to file.
IRS Penalties for paying taxes late or late filing
Interest and penalties start to accrue on any existing unpaid tax balances as of July 16th, 2020. If you pay your taxes by July 15th, you won’t incur any interest or penalties.
IRS penalties apply if you owe taxes and don’t file an extension or return on time. You’ll also incur penalties in the case of filing your extension or return on time but fail to pay the taxes owed by the tax deadline.
Generally, penalties won’t apply if you’re anticipating a refund and don’t file an on-time tax return.
Be aware that penalties for not filing a tax return or not e-filing or filing an on-time tax extension are significantly higher than not paying owed taxes. For instance, 5%/month of the tax amount owed, plus interest, is the penalty for filing late versus the 0.5%/month, plus interest, late payment penalty.
Consequently, it’s in your best financial interest to file your tax return on time or file an extension and pay as much of your taxes as you can, versus the “queen of denial” approach of failing to file and getting whacked later for tax penalties and associated interest.
12. How can I find gay-friendly tax preparation near me?
An easy way to find a qualified tax preparer is to search “gay-friendly tax preparation” on here on Thumbtack.
13. What if I can’t pay or I’ve fallen behind in my tax payments?
Owing back taxes to the federal or state government sucks! Your wages can be garnished. Your bank account can be drained. You could get a lien or levy on your property. Worse yet, the IRS can add up to a 25% penalty every month on what you owe. Remember that compound interest goes both ways.
It’s a nightmare.
If you can’t pay your taxes or you’ve fallen behind in your taxes, our friends here at Debt.com can help you.
14. What ways should same-sex couples spend or invest their tax returns
1. Pay off debt
Using your tax refund to pay off debt, especially your debt with the highest interest rates, can help you save thousands of dollars. For many, because of their high-interest rates, this is a better way to use their refund than investing it in the stock market
See what we told CNBC about the Debt Lasso Method:
2. Build up emergency savings
If your emergency savings fund is looking skinny or you have nothing put aside, consider using your refund to add to or begin your savings. This will help you stop taking one step forward and two steps backward with your money – that’s peace of mind.
The best way to grow your emergency savings account quickly is to 1) keep your emergency savings account at a bank or a credit union “an arm’s length away” from you and your current bank or credit union and 2) get as high an interest rate as possible.
To help with both of those goals, we suggest:
1. CIT Bank
The Savings Builder Account with CIT Bank typically offers one of the best savings rates around.
CIT’s base savings rate is currently 1.01%. If you can invest $100 a month with a recurring deposit, you can take advantage of CIT’s Monthly Savers Plan, too. Plus, with CIT, you’ll have no opening, monthly servicing or online transfer fees.
2. Chime Bank
Chime Bank has no application or other hidden fees, which will help if you have a small refund to start your emergency savings.
Chime’s especially known for its award-winning mobile app to help you track the rapid savings and growth of your emergency savings account.
3. Radius Bank
Like the others, there are no hidden fees and you can get your paycheck up to 2 days early under certain conditions. Easy enough, you can apply online in as little as 3 minutes.
Get 5 more steps to build your emergency savings even more on this Queer Money®:
To save even more money in your emergency savings account faster, click here and try just one of these!
3. Invest it in your Roth or Traditional IRA
Investing the refund in your Roth or Traditional IRA is also a smart money move to bolster your retirement savings and long-term financial health.
While Blooom can help you invest your Roth or Traditional IRA money if your account is at either Vanguard, Fidelity or Charles Schwab, there are other recommendations if you hold your Roth or Traditional IRA elsewhere.
If you’re an independent investor, meaning you like to do invest yourself, open an account with M1 Finance. Best of all, M1 Finance is free for retirement accounts with a minimum of $500 that you can access by clicking here.
M1 Finance is a flexible automated investing platform and great for individuals who like pre-built and customized Exchange Trade Funds (ETF)-based portfolios, though they can do much much more. Plus,
• Trading is free
• There are no asset under management (AUM) fees
• There are no account fees (for brokerage accounts with a minimum of $100 and retirement accounts with a minimum of $500)
M1 Finance also allows for socially responsible investing, which is huge for the queer community.
If you think you’re too broke to invest, think again. You’re not when you invest through Acorns here!
Acorns uses spare change savings and cash-back rewards to let its account owners invest in taxable and retirement accounts using spare or loose change. So, if your tax refund is small, Acorns is a great way to get started with investing.
Hear about the differences and benefits of Roth and Traditional IRA’s on Queer Money®:
4. Give to charity
Give until it feels good! There are many charitable organizations that accept tax-deductible donations.
A few ideas:
Gay taxes with Credit Karma on Queer MoneyMore than a quarter of same-sex spouses seem to still be confused about selecting a filing status. - Christina Taylor of Credit KarmaClick To Tweet
The Credit Karma LGBTQ tax study
- 150 respondents (same-sex married spouses)
- Gauge awareness of available tax breaks
Why tax law can be confusing for same-sex married couples
- 1,000 laws on books for married couples
- Federal law may differ from state law
Christina’s top takeaways from the study
- More than ¼ confused about filing status
- Some still not filing jointly on a federal return
- Unaware of amended return opportunity
- Unaware of the available adoption tax credit
The five potential filing statuses
- Married filing jointly, married filing separately
- Single, head of household, qualifying widower
The details of the adoption tax credit
- Available to every status but married filing separately
- Up to $13,500 per adopted child
The parameters for filing an amended tax return
- Up to 3 years after filing or 2 years after paying
- Take advantage of credit or change filing status
- Through CPA, updating software or by hand
Credit Karma’s free tools for filing taxes
- A personal product based on a life event interview
- Easy, quick and free (federal and state return)
Christina’s advice around filing for a medical deduction
- IRS likely to question gender reassignment surgery
- Secure doctor’s diagnosis to support treatment
- Must exceed 7½% to 10% of AGI to claim
Credit Karma’s support of the LGBTQ community
- Empower to make financial progress
- Educate around available tax credits
- Offer free tools for filing
Here’s more info to help you with your overall financial plan:
- How to Retire? 21 Tips for Financial Planning for Retirement
- 11 Secrets of Gay Power Couples
- Here’s How to Pay Off Credit Card Debt Fast!
Michelle Beauclair is a TX-based freelance writer and crafts blog posts that engage readers and boost conversions. She’s a helicopter horse and dog mom whose favorite music artists include 2Cellos and Stevie Ray Vaughan. Her clients include Debt Free Guys, Manna Pro, and Standlee Forage. View her portfolio at Beau Clair Media.