The June 26, 2015 Supreme Court decision in Obergefell v. Hodges was a landmark case for civil rights.  Legalizing same-sex marriage has a major impact on the lives of same-sex couples who have been disadvantaged both socially and financially.  Socially, this legislation will ease the burden of same-sex couples who want to adopt children, it makes estates planning less complicated, and shows a growing national acceptance of the LGBT community as a whole.  Filing a joint tax return is beneficial, in general.  There are a large number of incentives in the U.S. legal code for married individuals.  This, however, is not a blanket statement.  As we enter the 2016 tax season, there are several things to keep in mind.  There are both financial and tax advantages and disadvantages for people who consider marriage, which will be discussed below.  The key fact is that same-sex couples are now on equal footing with and must take the same considerations on both the act and timing of marriage as their heterosexual counterparts.

Same-sex couples can now file joint tax returns and enjoy the same benefits the filing status provides that heterosexual couples have been granted throughout our nation’s history.  The Obergefell case allows for a unique opportunity for gay couples, however.  If the couple was married in a state that recognized gay marriage one year or more prior to the Supreme Court’s decision but resided in another state that did not recognize their marriage, they have the option to amend prior year returns to reflect their joint status and claim the refunds that would have been available to them if their marriage was legal at the time.  The statute of limitations for individuals to amend their returns is 3 years.  That means you have until April 15 to amend your 2012 return.  Married couples also have an increased exclusion on the gain from the sale of their home, going from $250,000 to $500,000.  Those are just two of the myriad assortment of tax advantages now available to them.  However, it is very important to look at the disadvantages as well.

Although taxes and finances should not be the sole reason to get married or to hold off on the big ceremony, they are still important aspects to consider, especially with the commitment that marriage entails.  In certain cases, some individuals might see adverse effects from walking down the aisle, or at least walking down too early.  We see this most often with middle-class families.  For example, filing jointly might cause couples to pay tax at a higher marginal rate that could have been avoided if they filed separately.  While this is something that has been taken into consideration by heterosexual couples for decades, a rush to the alter in the second half of 2015 could cause a greater tax liability than if they had waited until the beginning of 2016.

There are also non-tax financial considerations when dealing with marriage.  Many benefit programs use taxable income as a base to determine eligibility.  For high net worth individuals this poses no problem, but it can be a serious issue for middle class families.  Here is one example:  A single parent has sole custody of his/her child. Based on the parent’s income, the child qualifies for decreased childcare fees and is eligible for a government-provided medical insurance.  Because the parent is on the cusp of the income limits, the child could lose these benefits if the parent gets married to his/her partner.  If the partner is in the same income position, the added expenses could be substantial.  If one of the partners is planning on seeing an increase in income in the near future, it may be beneficial for the couple to wait until that increase is realized before getting married.

For high net worth individuals, trusts are another area of consideration.  Prior to Obergefell, an individual could appoint his partner as the Independent Trustee to oversee the trust in the event of the death of the Trustor.  Independent Trustees cannot be beneficiaries or spouses, so the legalization of same-sex marriage could have negative legal ramifications.  If this sounds familiar, make sure to have a conversation with your estate attorney to see if the trust needs to be updated.

Two other potential disadvantages deal with real estate.  The first is the home mortgage interest deduction.  The second is the exclusion of the gain from a sale of a primary home.  Section 163 of the Internal Revenue Code allows a taxpayer to deduct the mortgage interest on their primary and secondary residences.  If each partner in a couple owns one home, then this is not a concern.  If, however, at least one partner owns a third property, the couple would not be allowed to deduct the mortgage interest on that home unless it was turned into a rental property and reported on Schedule E of their Form 1040.

Section 121 governs the gain exclusion from the sale of a primary home.  This exclusion is allowed once every two years.  Using the example above, if the couple is already married and wishes to sell two of the three properties, they would have to wait two years between sales or recognize the gain from the sale of one.  If, however, they are not yet married but are planning on becoming so, they can each sell a property while they are still legally single and can receive the exclusion on both homes.

The last disadvantage we will discuss involves the net investment income tax (NII).  This is a major issue for wealthy clients with investment income over $200,000.  If a partner has money invested in stocks and their gain from sales of stock are above $200,000 but still close to that number, they can gift stock to their partner with a basis up to $14,000 tax-free. Capital gains will still be recognized, but the NII tax may be avoided.  This also applies for the gain on sale of other appreciated property, as well.  If the couple is married, then a gift to the spouse is in substance a gift to themselves, so the amount might still be subject to the NII tax depending on the amount of gain (the exclusion for joint filers is $250,000).

As stated, there are great tax planning opportunities for same-sex couples who may now file jointly.  There are also some pitfalls that need to be thoroughly considered before making such a big decision.  Overall, the important thing to remember is that these considerations are welcome ones, not only because it makes the life of a tax practitioner easier, but because same-sex couples are now allowed the same benefits, stresses and securities that heterosexual couples have had for centuries.