While year-end tax planning can be valuable for everyone, the tax savings can be even larger for gay married couples. According to the US Treasury Department gay married men make more, on average, than our straight married counterparts. Don’t despair ladies. Lesbian married couples also make more than their straight counterparts. More income brings more opportunities to shave down your tax bill with some proactive tax planning.
If you ask me, there isn’t much that is more fiscally fabulous than saving money on taxes. Okay, maybe I’m just a money nerd who gets excited about things like that. Whether you have been with your same-sex partner for months or years, fully recognized legal marriage is still new for us in the LGBTQ community. With marriage equality comes all of the fun things, including filing taxes together. As a gay financial planner who works with many same-sex couples across the United States, I can say from experience that many people have no idea how to pay less taxes.
Same-Sex Couples Will Get Hit with the Marriage Penalty in 2019
Getting married is amazing. I’ve been married to my wonderful husband for a little more than five years. However, filing taxes as a married couple is not quite as fabulous. We get hit with many of the marriage penalties in the tax code, and many other gay married couples are hit with them as well. Do me, and yourself, a favor. Be proactive when filing your taxes and don’t wait until 1 a.m. on April 14th to start thinking about finding a tax preparer. Just in case you didn’t know, taxes are due on April 15th.
Waiting until the last minute to plan or file taxes leaves you with fewer options to minimize your tax liability. It also increases the odds that you will get hit with a surprise tax bill. That is even more important for newly married couples, filing their taxes for the first time. Your tax brackets and deductions may be widely different when going from two single people to one married couple that’s filing taxes together.
Undoubtedly, many of you will be busy attending holiday parties, etc., but do yourself a favor and make the following year-end tax planning moves that are especially important for married LGBTQ couples. Why spend the time, you ask? Because once you’ve finished celebrating the New Year, many of the opportunities to reduce your tax liability will have disappeared just like that bottle of Dom Perignon used toast the new year.
Here are the Eight Year-End Tax Planning Tips for Gay Married Couples
1. Are You and Your Spouse on the Same Page, Financially?
Two people, two incomes (maybe more), one tax return. You will need to work together to get them filed, and you will want to be on the same page to help keep as much of your hard-earned money as you possibly can. There is nothing fiscally fabulous about paying more taxes than necessary.
For gay married couples, some tax deductions may make more sense now than in the past. You may also end up in a higher tax bracket, together as a married couple, which means more of your income is going to pay taxes. The marriage penalty may also mean a reduction of potential tax deductions. If this is your first year filing together, you might want to see if a gay Certified Financial Planner or CPA can squeeze you in for some much-needed financial planning guidance and expert tax advice.
As a fun and fabulous Certified Financial Planner playing beat the clock, with the calendar, for my clients, this is my busiest season by far. Everyday I must keep my nose to the grindstone, which leaves very little time for some fa la la la la, let me tell you. So if you tend to procrastinate, don’t. You may run the risk of not being able to meet with a CFP or CPA who might be able to help you before year end.
2. Review Prior Years’ Tax Returns for Both Spouses
While there is not a deadline to check your old tax returns before year end, now is as good a time as any. Many couples miss tax deductions, some miss reporting income, and others just realize they made mistakes on their prior-year tax returns.
If you were married at the state level and recently became legally married at the federal level, you may be able to amend your tax returns to filing as a married couple for up to the prior three years. I’ve worked with many people who were able to get thousands of dollars back after they amended past years’ tax returns. It never hurts to check if you are owed a refund. On the other hand, if filing as a married couple would cause you to pay more taxes, you should just leave things alone.
3. Plan Your Investment Portfolios as a Gay Couple
Reach out to your financial planner who specializes in working with LGBTQ couples and ask if there are any tax-planning opportunities in your non-retirement accounts. That can be a fiscally fabulous way to reduce the drag of taxes on the long-term growth of your investments. Paying less in capital gains along the way is like increasing your net investment performance without having to take on any additional investment risk.
Gay couples in the higher tax brackets should look to capture losses to help offset gains. You can use up to $3,000 in short-term losses each year to offset regular income. However, if you happen to be in a lower tax bracket, you may end up with the 0% capital gain rate for the year (income under $78,750 for a married couple in 2019). If that is the case, you may want to lock in some of the gains in your portfolio.
4. Be Generous and Charitable
We just passed Giving Tuesday, but there is still time to reduce your 2019 taxes with a generous donation to charity. That can be in the form of a check, or perhaps it is time to Marie Kondo your garage. Donate all the unwanted stuff to charity, and if you itemize your taxes, you can lower your tax bill. Win, win.
5. Max Out Your Retirement Accounts
Looking forward to having a fabulous retirement? Want to lower your tax bill now? If you said yes to either or both of those questions, consider topping off your retirement accounts for 2019. The income you defer into a 401(k) plan, IRA, or Cash Balance Pension plan is excluded from your taxable income, which means you will not owe taxes on that money at this time.
Your contributions can then be invested to help build up a large nest egg to help you secure a gay and fabulous retirement. For those of you who are not on track to max out your retirement accounts, you can defer some extra money from your paychecks before year end. For 2019, you can contribute up to $19,000 into a 401(k) plan. You will have until April 15th to fully fund a traditional IRA or Roth IRA, assuming you qualify. That could be another $6,000 tax deduction if using the traditional IRA. If only one spouse works, you may want to consider a spousal IRA to further lower your overall taxes as a gay married couple.
6. Be Smart With Your 2019 Tax Deductions
I’m sure we all hope to be making more money in the future, but sadly that is not always the case. Do you expect your household to earn more or less in 2020? If you suspect your income may shrink, accelerating tax deductions into 2019 may make them more valuable than waiting until 2020 to use them. For those expecting to make more money in 2020, the opposite may be true. Gay couples, expecting to have more taxable income in 2020, may want to push off charitable donations until January so they can be deducted against the higher income.
7. Have You Withheld Enough Taxes From Your Paycheck?
To help minimize the risk of a surprise tax bill in April, look at your paycheck and make sure you have had enough taxes withheld throughout the year. This step is even more important for gay and lesbian couples who are likely to have higher incomes. Even more at risk are LGBT couples who are self-employed, who have switched jobs, or who have multiple jobs.
In 2018, the first year under the Trump Tax plan, tax refunds were down substantially for people who made $100,000, or more, according to the Internal Revenue Service (IRS).
To avoid getting a smaller refund than expected, there is a free tax withholding calculator available on the IRS site. The tax calculator is suitable for employees and retirees. The process is a bit more complex for small business owners and the self-employed; if this is you or your spouse, get help from your gay Certified Financial Planner or Tax preparer.
8. Should You Take the Standard Deduction or Itemize?
Under the Trump tax plan, millions more of taxpayers are simply taking the standard deduction versus itemizing. Previously, around 30% of taxpayers filed a Schedule A to itemize tax deductions. However, under the Tax Cuts and Jobs Act (TCJA), that number has dropped to just 10% of filers. That being said, with many in the LGBT community living in places with higher incomes and higher costs of living, many of us may still be able to itemize our tax deductions.
Lower rates of itemizing are partially due to the $10,000 State and Local Tax (SALT) cap from the Trump tax plan. For gay couples living near West Hollywood, the Castro, Boystown, or Manhattan, your property taxes alone could be above the $10,000 SALT cap.
Additionally, more people are taking the standard deduction because of the higher base amounts. For the 2019 tax year, the standard deduction is $12,200 for single filers and $24,400 for married couples.
Congrats on making it to the end of this year end tax-planning article for gay couples. If you have already taken these eight tax-saving moves, go back to celebrating the holidays. But, if you have a few areas that need to be addressed, talk with your LGBT financial advisors and get your financial house in order. You’ve worked hard for your money, put a little extra effort into keeping more of it.