The benefits of tax planning for gay couples can be quite fabulous is you ask this gay tax planner. Our country’s tax code is not very friendly to double-income households, especially those without kids (enter many LGBT couples). According to the US Treasury Department, gay married men earn more, on average, than our straight married counterparts. The higher your income, the more imperative it is for you to look for ways to keep your tax bill in check yearly. If you need extra motivation, some of your tax savings could be used for something fun, like another vacation.
As a Los Angeles gay financial advisor, the last dollar earned by many of my clients is often subject to more than 50% taxation (state and federal combined). While the legal recognition of same-sex marriage is great for the LGBTQ+ community, it has created a tax headache for gay and lesbian married couples. With both of these facts in mind, it is easy to see how valuable tax planning can be for couples.
The Marriage Penalty For Gay Couples
The LGBTQ+ community fought long and hard for the right to get married. I’ve been married to my wonderful husband for almost nine years. However, filing our taxes as a married couple is not one of the benefits of our union. We find ourselves getting hit with many of the marriage penalties other gay couples also get hit with. Do me, and yourself, a favor, and be proactive with your tax planning. Please don’t wait until 1 a.m. on April 14 to start thinking about finding a tax preparer.
Waiting until the last minute to plan or file taxes leaves you with fewer options to implement various tax-planning strategies that could save you a ton of money. It also increases the odds that you wind up with a surprise tax bill.
Here Are The 10 Tax-Planning Tips For Gay Married Couples
1. Start Tax Planning As A Gay Couple
Tax planning for gay couples is a double sport; you must work together to get your taxes filed in order to pay the least amount in taxes possible. Work to get on the same page financially (or at least tax-wise) with your spouse to help keep more of your hard-earned money from the tax man. There is no reason to take pride in paying more taxes than is legally required.
As a gay household, you may benefit from some tax-planning strategies that didn’t make sense when each of you filed individually. Vice versa, some tax benefits you received previously may not be available as a gay married couple. Your combined incomes may push you into even higher tax brackets, making tax planning even more valuable. Likewise, the marriage penalty is tough on high-income gay couples.
If this is your first year filing taxes together as a married couple, 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.
2. Review Prior Years’ Tax Returns
Many gay couples miss potential tax deductions, some miss reporting income, and others realize they made mistakes on their prior-year tax returns. The sooner you catch these mistakes or omissions, the easier it will be to fix any issues.
3. Manage Your Investments As A Gay Couple
Tax drag (the amount taxes lower your net investment returns) can diminish the net returns on a great investment portfolio. Contact your fabulous financial planner who specializes in working with LGBTQ+ couples and ask if there are any tax-planning opportunities in your non-retirement accounts.
Building a tax-efficient portfolio can help you avoid phantom gains, minimize your capital gains each year, and reduce the amount of Medicare Surtax you must pay. Tax loss harvesting can give you a tax deduction against your regular income each year.
Paying less capital gains taxes along the way is like increasing your net investment performance without taking on any additional investment risk.
4. Being Charitable Could Help You Pay Fewer Taxes
There is still time to reduce your 2023 taxes by donating to your favorite LGBT nonprofit. Your donation could be in cash, or you could clean out your garage and get a tax deduction for the items you take to a charitable organization like Out of the Closet. You’ll get more closet space; if you itemize your taxes, you can lower your tax bill. Win, win.
The expenses incurred to donate your time may also be tax deductible for those who volunteer.
5. Optimize Your Retirement Accounts
If you want to have enough money invested so you’re able to maintain your standard of living in retirement, look to max out your retirement account contributions each year. You can contribute $22,500 to a 401(k) plan in 2023 if employed. If you are age 50+, you can make an additional $7,500 catch-up contribution.
If you are self-employed and 50+, you can potentially contribute up to $73,500 into a Solo 401(k) in 2023. If you need to save even more, you could potentially contribute $300,000 or more into a Cash Balance Pension Plan (actual limits will depend on your age and income). The contributions will be made pre-tax, meaning you won’t pay income taxes on these amounts this year.
6. Be Smart with Your 2023 Tax Deductions
Will your household earn more or less in 2024? If you suspect your income may shrink, accelerating tax deductions into 2023 may make them more valuable than waiting until 2024 to use them. The opposite may be true for those expecting to make more money in 2024. Gay couples expecting more taxable income in 2024 may want to push off charitable donations until January so they can be deducted against the higher income.
7. Adjust Your Payroll Deductions
No one likes to get a surprise tax bill. To help avoid this, look at your paychecks to ensure you have enough taxes withheld (as a married couple) from each paycheck. If your HR department doesn’t know your marital status (they don’t have to know your sexual orientation), they will likely withhold the wrong amount of taxes from your paycheck.
If you get a big refund each year, consider lowering your withholdings. This will give you more money to spend throughout the year or free up some cash flow, thereby allowing you to increase your contributions to your retirement accounts, further lowering your taxes in 2023.
8. Should You Take the Standard Deduction Or Itemize?
Millions of taxpayers have taken the standard deduction instead of itemizing in the past few years. 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, because many in the LGBTQ+ community live in places with higher incomes and higher living costs, several of us may still be able to itemize our tax deductions.
For gay couples living near West Hollywood or any other expensive gayborhood, your property taxes alone could be above the $10,000 SALT cap.
9. Self-Employed? Consider Hiring Your Spouse
If you are a gay small business owner or are self-employed, consider hiring your spouse. They are likely helping you in some capacity, and officially paying them could open the door to valuable tax-planning strategies. For example, their income could allow them to contribute to a 401(k) or Cash Balance Pension plan. It may also help them qualify for a larger Social Security benefit.
Hiring your spouse may also increase your home office deduction and change some of your options around health insurance tax deductions.
10. PTET For Gay Couples
As a gay financial advisor in Los Angeles, I work with many gay couples in high-tax states (California and beyond). Utilizing the Pass-Through Entity Tax (PTET) is a great way to minimize the damage Trump did to high earners with his $10,000 state and local tax cap.
Depending on your state and if you have self-employment income, you may get a larger deduction against your federal income taxes for all the money you spend on state and local taxes. Did I mention the property taxes on the median house in Los Angeles would put you beyond the $10,000 SALT cap? That doesn’t even consider the state taxes on the income required to pay said Los Angeles home.
Read more from Forbes about the PTET Tax Strategy.
Congrats on making it to the end of this tax-planning article for fabulous gay couples. Now is the time to act on these 10 tax-planning strategies for gay couples. If you wait until it is time to file your taxes, many tools available to pay fewer taxes each year will no longer be available for your 2023 taxes. You’ve worked hard for your money; put a little extra effort into keeping more of it.