Tax Considerations for LGBTQ Couples and Individuals
Tax issues for some LGBTQ couples have changed after the Supreme Court's rulings in United States v. Windsor and Obergefell v. Hodges. Specifically, LGBTQ couples that are married can now take advantage of the various tax benefits previously only available to married opposite-sex couples.
Filing Joint Tax Returns
Same-sex married couples can now file taxes jointly or choose the married filing separately option. After Windsor, the IRS ruled that same-sex couples that were legally married in any state would be treated as married for purposes of federal taxes, irrespective of whether their own state recognized same-sex marriages. After Obergefell, all states are required to provide same-sex married couples the same tax rights and benefits as opposite-sex married couples.
Other Tax Benefits and Obligations
Same-sex married couples are also able to claim their children as dependents on their joint federal tax return or one spouse can claim the child as a dependent if the couple files separately. They are also eligible for a child tax credit and may file as head of household if they provide more than 50% of a child's support. Usually a spouse that files as head of household can pay fewer taxes than someone who files as single. However, unmarried same-sex couples and those in domestic partnerships cannot access the same tools and benefits in connection with filing taxes.
One tax benefit for married couples involves monetary gifts such as cash, property or other assets valued at more than an exclusion amount that is annually adjusted for inflation. All taxpayers can give a certain amount of money to another person as a gift every year without paying taxes on the gift. In 2018, the tax-free gift amount was $15,000. However, any amount that exceeds this limit must be reported and the excess goes toward a lifetime total, which is adjusted for inflation every year.
The amount you report on your gift tax forms will count toward the assets that are exempt from the federal estate tax as "unified credit." This is the amount that is adjusted annually for inflation and that is exempt from the federal estate tax. All your assets can be transferred tax-free to a same-sex spouse.
Tax Implications of Transition-Related Costs
In a 2010 case, the Tax Court ruled that a transgender woman's medical expenses for sexual reassignment surgery and hormonal therapy were legitimate and often medically necessary treatments for gender identity disorder. The IRS contended that these treatments were different than other medically helpful treatments, and claimed they were cosmetic. After hearing and considering medical evidence, the court rejected this argument, finding that the treatments were intended to alleviate suffering for a medically recognized condition and did, in effect, enable healthiness.
In 2011, the Internal Revenue Service (IRS) confirmed the Tax Court's ruling and announced that transgender people may deduct these costs from their gross income for tax purposes. They are categorized as medical expenses for treatment of gender identity disorder. Similarly, breast augmentation surgery and chest surgery for transgender taxpayers may be deductible in cases where documentation from medical care providers reflects that the surgery was medically necessary for the patient and the effect could not be obtained solely through another means like hormone therapy.
All medical expenses that you hope to deduct must be documented. If you are hoping to deduct transition-related expenses from your adjusted gross income, you have to be able to show that you incurred the expenses as treatment for a medical condition. Moreover, to be deducted, the medical expenses must be more than 7.5% of your adjusted gross income.