As a married gay financial planner, I am fortunate to offer LGBTQ Wealth Management and LGBTQ financial planning guidance to many successful gay couples from across the country. Achieving marriage equality has been great for the overall LGBTQ+ community, in my opinion. From a gay tax planning standpoint, the right to get legally married may significantly increase the tax bills for top-earning gay and lesbian married couples. The US tax code is not particularly friendly to couples where both spouses work, have high incomes in high-cost-of-living areas (or high-tax states like California and New York) without children. 

With the various marriage penalties in the tax code, tax planning is imperative for middle-to-high-income gay couples. Paying more in taxes than is necessary is not fun. Similarly, getting hit with a surprise tax bill is a great way to ruin your day.

From my same-sex household to yours, here are a few things you should do now to be tax-wise this season and in the future.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

Gay Couples Need Proactive Tax Planning Guidance

Many gay couples only think about their taxes when they are forced to by the various IRS tax filing deadlines. This so-called tax planning likely only happens once per year. Before marriage equality, gay couples didn’t even have to talk taxes with their significant other this often. Work with your spouse and proactively plan to minimize your taxes, especially if one or both of you are self-employed, a gay business owner, or have equity compensation (think stock options, RSUs, etc.).

To help your LGBT household pay the least amount of taxes over time, high-income LGBTQ married couples should function as a tax slaying team. To do this efficiently, gay couples must talk about money, talk openly about money, and often talk about money. Talking about money and LGBTQ tax planning may not be fun, but let me tell you, large tax bills are not fun either. This goes beyond how to split the cable and electric bills.  It leads to how you can afford that next fabulous gaycation and still stay on track for a financially secure gay retirement.

I can hear you groaning through the computer. I get it. Thinking about taxes once per year is stressful enough. But when it comes to the marriage penalty hitting same-sex couples’ wallets, ignoring your taxes is not blissful. As a little extra motivation, saving money on taxes may be the difference between being able to afford that bucket list gaycation you have been dreaming of or writing a big check to the IRS.

Hopefully, you are working with a fabulous gay financial planner who is helping make this process easier while minimizing your taxes in a fabulously easy manner. Keep reading to see a few of the ways the marriage penalty smacks the finances of gay couples.

The ‘Marriage Penalty’ Is Rough For Many Gay Couples

Over the past 20+ years of helping gay couples with gay tax planning, LGBTQ Wealth Management and gay financial planning, I have seen many LGBT couples get slapped with a high tax bill from the marriage penalty. While the marriage penalty can hit all couples, it can be rough for high-earning LGBT couples. Much of the tax code is designed to benefit the Ozzie and Harriet nuclear family, where one spouse stays home and raises multiple children. Yes, I am aware many same-sex couples have children, but parenting is still less common in the gay community. Gay and Lesbian couples are more likely to be double income and tend to live in more expensive parts of town (on average, of course).

Gay Marriage Penalty Via Tax Brackets

Two high incomes and no kids can lead to some tax nightmares, especially when the incomes are via salaries (reported on your W-2). It would take an income of $578,125 for a single person to enter the highest federal tax bracket (37% in 2023). In contrast, a married couple enters the highest federal tax bracket at $693,750 of income. Depending on how your income is split, most gay high-earning couples will pay more federal income taxes as married versus single. 

For those living in high-tax states like California, the marriage penalty will likely carry through to your state taxes as well. The top California tax bracket is 13.3% can be quite painful for my clients in Los Angeles, San Francisco and Palm Springs.

Looking ahead, most of the tax proposals from President Biden would exacerbate the marriage penalty for a household with a combined income of more than $450,000. At this point, we are still talking about proposed tax changes, so no need to freak out yet. 

Further Reading: Tax Planning For Gay Couples

Gay Marriage Penalty When Owning Real Estate

There are a variety of tax benefits and tax deductions for owning real estate. Unfortunately, many real estate tax breaks are the same whether you are married or single. The mortgage deduction is limited to a tax deduction for the interest on a $750,000 mortgage, whether you are single or married. As a financial planner who resides in Los Angeles and Palm Springs, I’ll tell you this is a big deal for many of my clients who are gay couples. The typical home value of homes in West Hollywood is $1,039,419, according to Zillow. A single-family home in Palm Springs is not far behind this number. Even my friends in lower-cost states like Kentucky and Indiana tend to live in the more expensive neighborhoods.

The good news is there is not a marriage penalty when you sell your home. You can exclude $250,000 of gains if you are single and $500,000 of gains as a married couple. With many gay couples living in expensive parts of town, this benefit can be a huge tax saver.  

SALT CAP Marriage Penalty For Gay Couples

One of the most glaringly bad provisions for gay couples in the 2017 Tax Cuts and Jobs Act (TCJA) is the $10,000 state and local tax (SALT) cap.  Thanks, Donald. Since we are talking about the marriage penalty for same-sex couples, the SALT cap is the same whether you are married or single. So essentially, a married couple will have half the SALT cap that two single people would have.

All is not lost when it comes to tax planning for a gay couple with a big household income. There are tax planning opportunities for a  gay married couple that may not have made sense for one or both spouses when they were single. There may be some tax credits that now make sense to capitalize on with your high incomes now combined. Think solar tax credits or credits for buying an electric vehicle. Further, it could make sense for both spouses to increase (or perhaps start) maxing out their retirement account contributions based on their tax bracket as a gay married couple.

Side Note: If you are self-employed, ask us about the Pass-Through Entity Tax (PTE)that could help you avoid the pain of the SALT CAP.

Year-End Retirement Account Options for Gay Couples

Look at a spousal Traditional IRA or spousal ROTH IRA if one of you is a stay-at-home spouse. Or works somewhere that doesn’t offer a retirement plan. This may allow you to add a bit more to your retirement accounts each year. 

For those who are gay and self-employed or gay business owners, you can still open and fund a SEP-IRA or a Solo 401(k) for 2022. This could allow contributions as large as $61,000, each, for 2022. The Solo 401(k) has a similar $61,000 contribution limit but allows for a $6,500 catch-up contribution for business owners over the age of 50. Contribution limits have increased to $66,000 for 2023 plus larger catch-up contributions of$7500. For LGBT business owners looking to maximize their contributions, talk with your LGBT retirement plan expert to help determine which plan will allow you the biggest tax deductions.

Those making $280,000 or more should look at combining a 401(k) plan with a cash balance pension plan. This could allow you to shelter hundreds of thousands of dollars from taxation each year. High-earning gay-owned small businesses could lower their taxable incomes by millions of dollars over the next decade. Contribution limits are increasing for Defined Benefit Pension Plans in 2022- so make sure your Fiduciary Financial Planner helps you maximize your contributions to help minimize taxes.

A couple that files taxes together is married. Whether gay, straight, or otherwise, tax time is not sexy time. But making smart money moves and minimizing your tax liability could mean you get to take that next exotic vacation sooner. Make sure your tax planning goes beyond just filling in your tax forms once per year.

DAVID RAE, CFP®, AIF® is a Los Angeles retirement planner with DRM WEALTH MANAGEMENT. He has been helping friends of the LGBT community reach their financial goals for over a decade. He is a regular contributor to Forbes.com, the Advocate Magazine Investopedia and Huffington Post as well as the author of the Financial Planner Los Angeles Blog. Investopedia name David Rae one of the  “100 Top Financial Advisors” in 2022 for the sixth year in a row recognizing his specialty in LGBTQ Wealth Management.  Follow him on Facebook, or via his website www.davidraefp.com

We are excited to announce that Financial Planner LA has been named the #1 Gay Retirement Planning blogger by Cardrates.com

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