Married same-sex couples with children may face higher bills from the IRS as recent Supreme Court rulings start playing out in the tax code.
The increase probably would result from phasing out income tax credits for families, depending on the distribution of income between two working spouses, now that same-sex couples will be required to file joint returns with the Internal Revenue Service, according to a Congressional Research Service report.
“Under the new tax laws, you get the worst of both worlds,” said Jonathan Forster, chairman of the wealth management practice group at Greenberg Traurig LLP. “As you get pushed up into higher income tax brackets you also end up where there are certain exemption phase outs and deduction limits. You hit the ceiling on all these, you get whipsawed, particularly if both couples are working.”
The Supreme Court ruled June 26 in a 5-4 decision that excluding state-sanctioned, same-sex marriages from the federal definition of marriage is unconstitutional -- opening up a flood of tax- and benefits-related changes that in many cases will raise costs for gay married couples.
In most same-sex marriages, both individuals work, Forster said. While some couples have a big disparity in income between partners, that’s the exception rather than the rule, he said.
If each person earns $150,000 in wages and they have $30,000 in itemized deductions, $20,000 in state and local income tax and $10,000 mortgage interest, they will pay $9,400 more as married joint filers than as single separate filers based on current federal laws, Forster said.
“Generally speaking, if there is a wide disparity in the income between the two spouses, they’re more likely to pay less total taxes as a married couple than they would as single people,” said Courtney Joslin, professor at the University of California Davis School of law who specializes in family and sexual-orientation law. “By contrast, if the two incomes are closer together, they’d probably have to pay more as a married couple than they would as single people.”
With children, the picture looks worse, Bloomberg BNA reported. The loss of the earned income tax credit is one area where same-sex spouses with children stand to see a tax bill, according to the Congressional Research Service.
“Marriage penalties” can occur when the couple’s joint income pushes them into the range where the credit phases out or results in ineligibility, the report said.
Joint filers could also face a phase-out for the child tax credit as their joint income rises above a certain threshold, as the phase-out threshold for married couples is less than twice that for unmarried individuals, CRS said.
“As a result, two unmarried individuals might each qualify for the credit but receive a smaller credit or become ineligible for it if married,” the group said.
Ineligibility for education tax credits probably would double for married filing jointly parents.
Couples in which one same-sex spouse wishes to adopt the other spouse’s child may also lose out on the adoption tax credit, because the credit isn’t available when adopting a spouse’s child, the report said. Families also stand to lose the child and dependent care credit if one spouse has no income, disqualifying them for the credit, CRS said.
Same-sex married couples who both contribute to dependent care flexible spending accounts also may find themselves in a situation where they over-contributed in the first year in which they file as a married couple, CRS said. This is because under current law, taxpayers with children may contribute only up to $5,000 tax-free to an account, whether married or not.
So some couples may find anything contributed above that amount have become taxable, even though individual incomes makes them eligible for the child and dependent care credit, CRS said.
Even so, there are also advantages for same-sex couples when it comes to tax season.
“One thing that will be true for everyone, regardless of their tax liability, is that filing their taxes will become much easier,” Joslin said. “Filing taxes has been extremely complicated for married same-sex couples because they had to calculate their taxes twice.”