Spotlight on LGBTQ+ Mobility

This week I had the honor of presenting on Benivo’s “The View from the Top” show called “Moving with Pride – Spotlight on LGBTQ+ Mobility.” I discussed some of the tax considerations for the LGBTQ+ community and wanted to share those thoughts here.

In preparing for this show, I realized how little I know about this topic. Obviously, the tax treatment of the LGBTQ+ community varies widely throughout the world. But I thought I could list some key tax and legal considerations to investigate regardless of location:

  • Whether same-sex couples can legally marry and whether there are any income tax breaks available such as joint tax return filing or additional personal allowances.
  • Whether there are any estate or inheritance tax issues to consider when one of the spouses dies, including passing of assets to the surviving spouse and children.
  • Whether dependent children of same-sex couples are qualified tax dependents. Do they need to be legally adopted? Does it matter which spouse can claim them?
  • Whether the couple holds any assets jointly but only one spouse contributes to acquiring the asset. There may be a deemed gift for potential gift tax.
  • If a same-sex couple lives together and shares household expenses, who gets to claim household deductions such as mortgage interest? If one spouse pays the rent and the other doesn’t, is that considered a taxable gift or deemed income?
  • If a legally married same-sex couple decides to divorce, how are alimony and property settlement rights handled? How are child support and child custody issues handled?
  • Whether medical expenses for gender transition are tax deductible, or whether medical expenses to have a child by a surrogate or by IVF for one spouse are deductible.

I am most familiar with same-sex marriage rules within the United States and within my home state of Massachusetts. Massachusetts legalized same-sex marriage in 2004 before it was legal at the United States federal level. There was a period where there was a disconnect in tax treatment – same sex couples that married in Massachusetts filed tax returns separately for federal purposes but could file jointly for state tax purposes.

That all changed with a landmark 2013 federal Supreme Court case known as United States vs. Windsor. Ironically, it was a tax issue at the heart of the case that began the process of same-sex marriages being recognized throughout the U.S. The case involved a surviving spouse of a same-sex marriage seeking an estate tax exemption called the marital deduction for the assets she inherited from her deceased spouse that is only available to legally married couples. The ruling paved the way for married same-sex couples to receive federal tax benefits, including the filing of joint tax returns and the estate tax marital deduction.

Still, there were issues after Windsor. Generally, whether the marriage is legal is based on where the marriage occurs – the place of celebration rule. There were potential consequences for a same-sex couple who married in Massachusetts – the place of celebration – but then moved to Texas where same-sex marriage wasn’t recognized under state law. That meant the couple could not legally get divorced in Texas.

That disconnect changed under a second landmark case in 2015 known as Obergefell vs. Hodges. This ruling was primarily a rights issue. Under the Obergefell ruling the fundamental right to marry is guaranteed to same-sex couples by both the Due Process Clause and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution. This meant, among other things, that Texas had to recognize the same-sex marriage.

A recent same-sex marriage announcement caught my attention, and I wondered if they would have any tax concerns. Mariana Varela, Miss Argentina, and Fabiola Valentín, Miss Puerto Rico, announced they married in San Juan Puerto Rico. Both had met during the 2020 Miss Grand International competition in Thailand. Both Argentina and Puerto Rico allow same-sex couples to legally marry and are also legal for tax purposes. Should they decide to settle in Puerto Rico, married same-sex couples in Puerto Rico can elect to file tax returns jointly or separately.

I also investigated LGBTQ+ tax issues in Germany because only legally married couples in Germany enjoy a tax benefit known as “income-splitting” that is not available to unmarried couples. Income-splitting is where the combined income of both spouses is divided by two, the tax formula is applied, and the answer is multiplied by two. The advantage of income splitting is using the lower tax rates twice. Same-sex marriage has been legal in Germany since 2017 and thus income splitting is allowed for same-sex married couples.

I then looked at LGBTQ+ tax issues in Africa. Here there is a very different result from Germany or the United States. According to a 2020 global review by the International Lesbian Gay Bisexual Trans and Intersex Association (ILGA), nearly half of the countries worldwide where homosexuality is outlawed are in Africa. Only one country in Africa has legalized same-sex marriage, South Africa. But couples in South Africa file income tax returns separately so it would seem there are no significant tax issues for same sex married couples there. There are 22 countries in Africa that have moved to decriminalize same-sex relationships. Still, same-sex couples generally cannot be legally married throughout most of Africa. In these countries there is the potential of tax problems for the LGBTQ+ community.

During my research I was reminded of a LGBTQ+ controversy from my youth growing up in Boulder Colorado. In 1975 the first same-sex marriage license in the United States was issued and officially recorded by the Boulder County Clerk at the time, Clela Rorex. This occurred four decades before the Obergefell landmark ruling. Ms. Rorex issued six same sex marriage licenses in 1975 and 1976 before the Colorado Attorney General instructed her to stop the practice. One of the couples that obtained the marriage license did so because one of the spouses was Australian and they hoped he could apply to the federal government for permanent residency in the U.S. Unfortunately, the application was denied at the time, but he did obtain a U.S green card years later after the Obergefell decision. It just highlights the progress the LGBTQ+ community has made since 1975, but there is still work to do.

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