Lesbian, gay, bisexual and transgender (LGBT) couples â€“ and individuals â€“ often face significant financial hurdles compared to their heterosexual counterparts. According to Chris Kollaja, a certified public accountant and partner at A.L. Nella & Company in San Francisco, California, LGBT couples often incur higher costs for everything from income taxes to employee benefits to adoptions because of prevailing laws and tax regulations. For example:
Income tax. In states where gay marriage is not legal, same-sex couples must file separate income tax returns, as with unmarried heterosexual couples. However, in states where it is legal (all of which have a state income tax, coincidentally), things get complicated. In those cases, if a couple wants to file a joint return, as opposed to â€œmarried filing separately,â€ they must complete two sets of tax returns: Each party must file a federal return as either â€œsingleâ€ or â€œhead of household,â€ and then they must complete a â€œmockâ€ joint federal return and then use that data to calculate their joint state return.
Thus, the couple will either have to spend considerably more time preparing their own taxes or pay their tax preparer more to do two sets of calculations.
Domestic partner benefits. Hereâ€™s another case where LGBT couples are treated differently: When companies offer domestic partner benefits, the benefits received are considered imputed income by the IRS and thus are added to the employeeâ€™s taxable income. (Note: This is also true for non-married, opposite-sex domestic couples.) Thus, if your domestic partner receives medical coverage through your employerâ€™s plan, you will be taxed on the additional premium amount.
Also, whereas opposite-sex married couples can use pretax dollars to pay for medical insurance premiums, domestic partners cannot. The same goes for paying for a domestic partnerâ€™s health care expenses on a pretax basis using a flexible spending account.
Retirement benefits. In many cases, same-sex partners are not entitled to equivalent retirement benefits. For example:
- Heterosexual spouses can receive up to 50 percent of their spouseâ€™s Social Security benefits if he or she is alive and the amount is higher than their own benefit. They can also collect their dead spouseâ€™s benefit if it exceeds their own. And they receive a $255 lump-sum death benefit if their spouse dies. None of these benefits apply to same-sex spouses under Social Security.
- Employers are not required to provide survivor pension benefits to same-sex spouses, although many do so to remain competitive in the employment market.
- Heterosexual married couples can contribute up to $5,000 a year to a spousal IRA for a non-working spouse; same-sex couples cannot.
- If one spouse in a heterosexual marriage enters a nursing home and applies for Medicaid, the other may continue living in their home without impacting Medicaid eligibility. However, if an LGBT couple owns a home and one applies for Medicaid, the other must buy out the sick partnerâ€™s share in order to remain in their home.
Veterans benefits. Despite last yearâ€™s repeal of â€œDonâ€™t Ask, Donâ€™t Tell,â€ veteranâ€™s benefits based on marital status remain unavailable to same-sex military spouses including: military hospital visitation rights; survivor benefits; increased compensation to spouses of disabled veterans; Veterans Administration Home Loan eligibility for surviving spouses; and burial together in military cemeteries.
Estate taxes. Heterosexual married couples can transfer unlimited assets to each other without paying federal estate taxes. Everyone else, including married same-sex couples, must pay taxes on estates that exceed $5.12 million in 2012. (This limit will revert to $1 million in 2013 unless Congress extends it.) Similar rules apply to estate and inheritance taxes levied by states, although in states where gay marriage is legal, the treatment is equal.
Adoption. Each state has its own laws governing adoption and they vary widely. For example, some states allow same-sex couples to adopt children together, while others require one parent to complete the adoption process first, and then have the other partner petition to adopt separately â€“ in effect doubling the cost and paperwork. And, several states prohibit adoption by same-sex couples altogether.
â€œThe most important takeaway for GLBT people â€“ and for unmarried heterosexual couples as well â€“ is that you canâ€™t take planning for granted,â€ says Kollaja. â€œItâ€™s critical to establish your wishes through proper documentation, whether youâ€™re single, living together or in a registered domestic partnership or married. Otherwise it could pose problems if you break up, divorce or die.â€
Kollaja offers these tips:
- Inventory all your assets (real estate, vehicles, bank accounts, stocks, etc.) and make sure everything is clearly titled and registered with the county, whether itâ€™s single ownership, joint tenancy with rights of survivorship, joint tenancy in common (where your share goes to someone other than your partner), community property or a trust.
- Make sure your will, trust, durable power of attorney and other legal documents spell out how you want your assets distributed and whom you want to make your medical and financial decisions; otherwise the courts may designate someone instead. This is especially important if you suspect your relatives might later challenge your will. Consult an attorney who specializes in domestic partnership issues.
- Ensure that youâ€™ve designated the proper beneficiaries for all insurance policies, retirement plans and investment accounts.
- Buy adequate health, property and casualty insurance. If youâ€™re married or in a registered domestic partnership, you could be held liable for your partnerâ€™s accident.
- If you care for children together, whether the biological child of one parent or adopted, file for custody rights, which youâ€™ll need for everything from signing school permission slips to registering them for your health insurance plan.
- Because many mutual retirement benefits are not available to GLBT couples, plan your retirement for two single people. Having your own long-term care insurance is particularly important.
â€œBottom line, make sure you have a trust or living will,â€ says Kollaja. â€œOtherwise, youâ€™ll be subject to the stateâ€™s probate laws, which could determine very different outcomes than what you would have wished. It is particularly critical for couples with children to designate guardians, since judges have been known to award guardianship to an independent administrator when family members have contested the estate.â€
ThisÂ article is intended to provide general information and should not be considered legal, taxÂ or financial advice. It’sÂ always a good idea to consult a legal, taxÂ or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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Jason Alderman is Senior Director, Global Financial Education, with Visa, Inc.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.