Heterosexual couples can get caught, too
Same-sex married couples celebrated the Supreme Court’s recent ruling that they are eligible for various benefits and tax advantages that other married couples have long enjoyed. These include the ability to add a spouse to an employer’s health-care plan without having to pay taxes on the benefit…to reduce income taxes in some cases by filing jointly…and to inherit an unlimited amount of assets from a spouse without having to pay a federal estate tax. But the newly available rights also can trigger some financial traps—traps that many heterosexual couples already have grappled with. Among the potentially costly traps that apply to same-sex as well as opposite-sex married couples…
- You might not be eligible to contribute to a Roth IRA. High earners aren’t allowed to contribute to Roth IRAs, which are retirement accounts that allow your savings to grow without being taxed in the future. Roth eligibility phases out for taxpayers with modified adjusted gross incomes (MAGIs) between $112,000 and $127,000 for single filers and between $178,000 and $188,000 for joint filers.So even if both spouses were previously eligible to contribute when each spouse filed a separate tax return, they might not be if they file jointly—which many same-sex couples will undoubtedly start doing. Now that they’re married in the eyes of the federal government, their only other option would be to file as “married filing separately,” which often results in higher tax bills. Filing jointly doesn’t affect only future eligibility to make Roth IRA contributions—it also could create a problem for spouses in same-sex marriages who already have made Roth contributions for 2013. At press time, the IRS had not yet issued guidelines addressing whether this would be an issue. (Heterosexual couples can find themselves unexpectedly ineligible for Roths as well, when they earn more during a year than expected.)
What to do: If you already have made contributions to a Roth for 2013 but no longer qualify, you can “recharacterize” those contributions as traditional IRA contributions. Failing to do this before your 2013 taxes are due next year could trigger steep “excess contribution” penalties—6% per year until the situation is corrected—unless the IRS gives same-sex couples a special break this year.
Important: A couple’s high earnings also can complicate contributions to traditional IRAs. The ability to use pretax income for traditional IRA contributions is phased out for high earners who have access to a retirement plan such as a 401(k) through an employer. For single filers, deductibility phases out between $59,000 and $69,000. For married people, it phases out between $95,000 and $115,000 for the spouse who is covered by the workplace plan and between $178,000 and $188,000 for the spouse who isn’t. But unlike with Roth IRAs, you can contribute to a traditional IRA regardless of your income—there’s just a chance that your contributions might not be tax-deductible.
- Your income taxes could rise. As already noted, same-sex married couples now typically will file their federal income taxes as married couples rather than as singles (assuming they live in a state that recognizes same-sex marriages). Many will discover that they have to pay more than they would if they were allowed to file as singles. This “marriage penalty” is steepest for couples in which both partners earn roughly the same amount—it can add thousands of dollars to the tax bite—but it affects almost any marriage in which both partners earn a significant amount. (However, if one spouse has little or no income, marriage likely will lower the tax bill.) The Tax Policy Center’s marriage penalty calculator can show you how you’re affected (TaxPolicyCenter.org/mpc).What to do: There isn’t much that married people can do to avoid the marriage penalty. Filing as “married filing separately” usually is not a solution—it tends to result in even higher tax bills, though there are occasional exceptions (see below).
- Deducting medical expenses is likely to be more difficult. Even before this Supreme Court ruling, 2013 was going to be a tough year to deduct medical expenses. Starting this year, medical bills not covered by insurance are tax-deductible only to the extent that they exceed 10% of a taxpayer’s adjusted gross income (AGI), up from 7.5% in prior years. But for same-sex married couples living in states that recognize their marriages, there’s now an additional hurdle that previously applied only to heterosexual married couples—that 10% threshold will apply to the couple’s combined income.Example: A single man has an AGI of $50,000 and uncovered medical bills of $10,000 in 2013. If he itemizes his taxes, he can deduct $5,000 in uncovered medical expenses—$10,000 in medical bills minus 10% of his AGI. But if he’s married and his spouse’s income pushes the couple’s combined AGI up to $100,000, he can’t deduct any medical expenses at all.
What to do: When one spouse has steep uncovered medical bills, run the numbers to find out if it’s worth filing income taxes as “married filing separately.” This is one of the rare occasions when selecting this filing status could save you money compared with filing jointly.
Helpful: The medical expense deductibility threshold still is just 7.5% if you or your spouse is age 65 or older (or will be by year-end). That means that being married could help, not hinder, your efforts to deduct medical bills if you don’t meet this age criteria but your spouse does, particularly if your spouse earns little income.
- Medicaid eligibility rules could put the assets of both spouses at risk if either requires a nursing home stay. Medicaid won’t pay for your nursing home care unless you have extremely limited assets and income. If you’re single and have substantial savings, you likely will have to pay nursing home bills out-of-pocket until your assets are depleted. The typical nursing home costs upward of $90,000 a year, so it doesn’t take long for a lifetime of savings to disappear. If you’re married and your spouse has savings, both partners’ savings likely will have to be tapped, though not totally depleted, to pay your nursing home bills—a fact that suddenly applies to same-sex married couples who live in states that recognize their marriages. Under Medicaid spousal impoverishment rules, such a spouse would be allowed to keep half of the couple’s combined assets up to $115,920 (less in some states), plus the house, car and a few other resources. That’s not nearly enough to support this spouse through a long retirement.What to do: Couples who are not yet married might consider remaining unmarried if one partner has significant assets and the other is using Medicaid to pay nursing home bills or has a health condition that might lead to a nursing home stay. This ruling also gives same-sex married couples added incentive to consider long-term-care insurance, though this coverage can be expensive.