When you think “sexy,” “passionate,” and “hot as hell,” I’m sure you think of taxes. Income withholding, Social Security, AMT: nothing trips your trigger more than big words describing things most of us know very little about, right?
Okay, maybe not hot as hell. Taxes can be confusing, boring, even frustrating. Perhaps it’s because not all of us are familiar with all the different ways taxes affect us, and perhaps it’s because the queer community has often had confusing tax situations before the Supreme Court ruled in favor of marriage equality in all 50 states. But now that Obergefell v. Hodges is won, we have some catching up to do with understanding our money.
Ryan Velo-Simpson, Associate Wealth Strategist VP at U.S. Trust, sat down with me to provide some helpful insight on the Pink Dollar and how LGBT folks should manage ours. We covered many subjects, including running a business, planning for retirement, and preparing an estate—all things that integrated wealth management teams at U.S. Trust can help organize. But we focused on the biggest area first: taxes, at every age, for every queer.
What Queers in Our 20s Need to Know about Taxes
First off, congratulations for even reading about this topic if you’re in your 20s. Taxes are not the most exciting subject for young folks because it may not seem applicable yet. But even younger adults need to be aware of how taxes affect them and how they should plan for the future.
You’ve probably noticed by now that you don’t get to keep your whole paycheck. You’ll see income tax withheld, both by the federal government and possibly your state. Washington State does not have its own income tax, but everyone will notice a federal deduction from their wages. You also likely notice that part of your paycheck that indicates Social Security and Medicare withholdings. These are referred to as Federal Insurance Contribution Act (FICA) taxes, and those combined taxes will equal 7.65% of your earned income. So when you pull a long week of overtime to pay for that Ariana Grande concert, don’t count on having an entire week’s worth of wages with which to make it rain.
The good news? That money you pay toward Social Security and Medicare will be there to support you when you retire (so long as these programs are funded and continue to receive federal advocacy).
Of course most states, including Washington, have a sales tax. This varies from region to region but you’ve also likely noticed you pay more for condoms than just the $7.29 listed on the box. Oregon does not have a state sales tax, so many Washingtonians will find it convenient (and dare I say a little thrilling) to shop in Oregon and pay what something actually costs! But be careful, friends—Washington State also taxes on goods purchased in sales-tax-free states if you plan on using those goods in Washington. So if you thought you’d get a good deal buying a car in Portland, it may not actually save you money when you claim the car on your taxes that year and pay the equivalent of your area’s sales tax rate.
Filing your taxes before April 15th can be a hassle, but if you’re like most 20-somethings, you get a nice refund! This is granted to taxpayers whose income was low enough, and whose withholdings were high enough, to warrant getting some money back. But here’s a helpful tip: you can itemize your tax deductions. The standard, non-itemized process is simpler, but you may qualify for more money back on your tax returns if you itemize. Most folks in their 20s will not itemize deductions (such as mortgage interest and property taxes, medical expenses, charitable deductions) because the standard deduction will be most beneficial, however there are some deductions to taxable income that everyone gets to take, and these are both “above the line deductions” (education expenses, student loan interest, IRA contributions) and deductions an employer automatically makes for you (HSA and 401k contributions and health insurance premiums). Itemizing may be especially applicable if you have significant medical bills, including gender confirmation surgery or expensive hormone therapy. (Thanks to a landmark court case, O’Donnabhain v. Commissioner, 2010, expenses from counseling, surgeries, and transgender medical care associated with transitioning are now considered necessary, not cosmetic, and thus may be eligible for tax deduction.)
What Queers in Our 30s, 40s, and 50s Need to Know about Taxes
By now, this subject probably means more to you since you’re dealing with taxes beyond “where’d my paycheck go?” Income taxes, FICA withholdings, and itemized deductions all apply to folks in their 30s, 40s, and 50s, but at this point in life it’s more likely that you own a home, have a family of your own, and perhaps even own a business. What tax concerns might you experience?
First let’s start with jumping the broom. Filing taxes as a married couple is much simpler now that all 50 states are required to recognize same-sex marriages. Before, couples could be wed in Massachusetts, then considered “unmarried” upon moving to Texas for work and lose their joint tax privileges. As of June 26 2015, Americans either file as married or unmarried, regardless of your spouse’s gender.
But there’s one complication that may be easy to overlook: what if you own property with someone and you’re not married to them? Perhaps they’re your partner and marriage just isn’t for you, or perhaps you purchased a home with a friend for the affordability factor (especially with Seattle’s property market these days). In this case, you will need to decide if you want to itemize your taxes or not, and if so, who will do the itemizing. It may be in your best financial interest if one person claims all the property taxes and the other does not, especially if one party plans to itemize and the other does not, or if the higher earner could get a richer tax break. There might be of more benefit as an entire amount deductible by one instead of splitting the deduction between many. Consult with a tax counselor in this case to see if the taxpayers in the home would see a higher benefit with one party claiming the deduction rather than splitting the deduction between everyone.
If you sell your home or other high-value investments, you should also be aware of capital gains taxes. This type of tax is applied to the sale of real estate, stocks, bonds, and other large investments, taxed at a rate of 15-20%. For non-real-estate investments, you may qualify for the lower rate if you’ve owned this investment for longer than a year. In the case of homes, a “principal residence exemption” establishes that if you have lived in your home for at least 2 years, then the first $250,000 of capital gain (or $500,000 if married) is exempt from capital gains tax. So, if you haven’t lived in your home for two years yet and are thinking of selling, the gain (which might be significant due to the market the last few years) will all be taxable as opposed to getting a hefty exemption once you live in the home for two years. If you’re considering selling large investments after owning them less than a year, or flipping a home that you haven’t owned for two full years, it may not be worth it to sell just yet, but that’s a good discussion to have with a financial adviser.
At this stage in life, you may also be considering extending the family and adopting a couple of bouncing bundles of joy. Congratulations! It can be expensive, but Uncle Sam is willing to help you out. Ryan Velo-Simpson explains that you can claim a tax credit for adoption expenses. “For last year’s tax returns you could claim a credit up to $13,190 per child you adopted, per year. Basically the first $13,190 you spent adopting a child was comped by the IRS.” This amount may be adjusted each year depending on inflation and such, but is a huge value for folks who are interested in raising children. Additionally, many employers will provide financial adoption assistance for their employees, and this assistance is often exempt from taxes.
Let’s say you’ve opened a new salon, birthed a software start-up, or created your own consulting firm. Business owners must also be aware of special FICA taxes. If you’re an employer, you will be responsible for paying FICA tax rates for each of your employees, at the same 7.65% rate that you withhold from their earnings. And if you’re self-employed, you’ll need to pay those Social Security and Medicare withholdings for yourself as an employer, and as an employee: 15.3% total. So make sure your business strategy will set you up for enough financial success to clear these requirements comfortably.
What Queers in Our 60s and over Need to Know about Taxes
Taxes should mean a great deal at this stage in life. You’re likely approaching retirement if you haven’t retired already, and living on a fixed income requires good financial health. At this point you’re likely to own more assets than you did 20 years ago and should be making preparations for your estate.
Theoretically, folks in their 60s and over have more money to their name after working and saving/investing throughout their lives. This increases the likelihood of being comfortably wealthy in your golden years. Not a bad place to be! But be mindful of tax details associated with higher income brackets or higher amounts of capital. For higher-earning taxpayers, there is an Alternative Minimum Tax (AMT) in place to prevent someone from eliminating their tax liability through deductions and credits. AMT operates separately from regular income taxes and only affects a small, wealthy minority of taxpayers. If your net-worth is high enough to warrant an AMT, consider working with a tax professional to ensure you complete this process properly.
You might also be thinking about transferring your wealth, both while you’re alive and posthumously. These transfers are subject to taxation unless they are given to your spouse or a charity. For any other number of people you transfer wealth to in a year while you’re living, you will be taxed if you give away more than $14,000. This is labeled as a gift tax. So let’s say you’re feeling very generous and wish to give away $20,000 to a group of 30 people in 2015. Go for it! Just keep in mind that you’ll be taxed on $6,000 of it. After your death, your leavings will be subject to an estate tax unless they are left to a spouse or charity. Work with a financial advisor (like Ryan Velo-Simpson) to discuss the options of setting up a trust or managing philanthropy legacies, ensuring that your money goes exactly where you want it to go, with every insurance “i” dotted and every tax “t” crossed.
When in doubt, seek out an accountant or tax professional to go through the ins and outs of taxes and wealth management as they relate to your personal goals and circumstances. In our upcoming finance blog conversations, we’ll get into the fun stuff: creating a business, managing an estate, and planning for retirement. Stay tuned for more!
Got questions for the financial guru Ryan Velo-Simpson? Feel free to comment below or email me, your go-between, at firstname.lastname@example.org.