Lesbian, gay, bisexual and transgender (LGBT) couples -- and individuals -- 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, Calif., 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 "married filing separately," they must complete two sets of tax returns: Each party must file a federal return as either "single" or "head of household," and then they must complete a "mock" 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. Here'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 employee'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 employer's plan, you will be taxed on the additional premium amount.
Also, whereas opposite-sex married couples can use pre-tax dollars to pay for medical insurance premiums, domestic partners cannot. The same goes for paying for a domestic partner'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:
Veterans benefits. Despite last year's repeal of "Don't Ask, Don't Tell," veteran'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 -- in effect doubling the cost and paperwork. And, several states prohibit adoption by same-sex couples altogether.
"The most important takeaway for GLBT people -- and for unmarried heterosexual couples as well -- is that you can't take planning for granted," says Kollaja. "It's critical to establish your wishes through proper documentation, whether you're single, living together or in a registered domestic partnership or married. Otherwise it could pose problems if you break up, divorce or die."
Kollaja offers these tips:
"Bottom line, make sure you have a trust or living will," Kollaja says. "Otherwise, you'll be subject to the state'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."
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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