Monthly Archives: November 2012

How Marriage Equality Affects Your Retirement: IRA Tax Loopholes Available to Opposite-Sex Married Couples Only

26 Monday Nov 2012

Posted by in Marriage, Retirement, Taxes

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Individual Retirement Accounts (IRAs) are powerful tools for funding your future.  Putting money into an IRA can be a great way to save for your retirement because it provides tax benefits in the present.  Unlike some retirement plans, IRAs can be set up by anyone; they do not have to be set up by your employer.

One of the major benefits of an IRA is that all or a portion of your contributions may be tax deductible and some taxpayers can claim a tax credit for their contributions. Additionally, any earnings on the money you’ve put in will be tax-deferred until you take the money out.  This benefit is particularly useful if you expect your annual income to be less during retirement years.

There are, of course, eligibility requirements for participating in an IRA. First, you must be under age 70 ½, and second, you may only contribute if you have taxable compensation for the year.  Each year the IRS assigns a maximum dollar amount that can be contributed; it is currently $5,000. Anyone under age 70 ½ can contribute the lesser of that $5,000 or their taxable compensation.  As an example, if you earn $6,000 you can only contribute $5,000; if you earn $3,500 you can only contribute $3,500.

It is this “taxable compensation” rule where we come to our first loophole only available to straight married couples, i.e. “spouses” as defined by DOMA.  If you are otherwise eligible to contribute to an IRA but are not working, and therefore have no taxable compensation, you can use your spouse’s income to qualify you for contributions. When one spouse earns $10,000 and the other earns $0, both can contribute up to $5,000.  Unless of course the non-working spouse is part of a same-sex couple, in which case no contribution is allowed.

This means that if a person has enough cash to contribute the maximum every year, but isn’t allowed to because they have no taxable compensation and aren’t considered a spouse, they miss out on up to $5,000 in tax deductions every year.  This essentially results in a gay person having to pay a potential $500 to $1,400 more in taxes, per year, than their straight counterpart.

Next let’s talk about what happens when you pull the money out of these plans.  Depending on what portions of your contributions were deductible, the distributions may be fully or partially taxable as ordinary income.  Furthermore, if you pull the money out before you’ve reached age 59 ½ a 10% penalty will be imposed. Luckily, for some, there are a few ways to get out of paying this.

The IRS has provided several exceptions that allow a taxpayer to avoid the 10% penalty.  While under the right conditions most of them are available to all taxpayers, there are also circumstances in which they are not.  There are three exceptions that apply to individuals who take a distribution to pay for certain expenses for themselves or their spouse[i].

  1. The money can be pulled to pay for health insurance premiums for an unemployed taxpayer or their spouse.
  2. The money can be pulled to pay for higher education expenses for the taxpayer or their spouse.
  3. The money can be pulled to pay for the purchase of a home if the taxpayer or their spouse qualifies as a first-time home buyer.

As an example of these rules in practice, let’s imagine a $10,000 distribution used to pay for higher education expenses.  One man can pull out $10,000 to pay for his wife’s education without penalty while another man who pulls out $10,000 for his husband’s education has to pay a $1,000 penalty.

Don’t get me wrong; the rules were created with good intention.  They are theoretically providing financial incentive for people to stay insured, go to college, and purchase homes.  The problem, albeit unintended, is that in this context, the exclusion of same-sex partners from the federal definition of spouse makes health insurance, education, and homes less accessible to the LGBT community.

Until rights and laws are applied equitably, we must work to understand the consequences of our legal inequality.  The benefits of marriage are more expansive than many of us realize.  I fear that as same-sex marriage begins to feel more attainable, those fighting for it will lose their sense of urgency.  Unfortunately, when it comes to financial rights and obligations, the inequality of today can have a tremendous impact on the future. Gaining parity ten years from now will not make up for present imbalance.

[i] In many cases the funds can also be pulled for children, grandchildren and certain other family members.

Dinner with Volker Beck: European LGBT Rights Leader and Member of German Parliament

14 Wednesday Nov 2012

Posted by in International

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Without a doubt one highlight of my trip to Europe was meeting Volker Beck, current spokesperson for Germany’s Green Party. While in Berlin, I had the honor to attend a dinner and discussion with him and a group of my colleagues.

Volker Beck is an openly gay member of German Parliament and has been working for LGBT rights since the 1980’s. His accomplishments over the past 30 years have been many. While he is most known for his work with the European LGBT community, he is also highly involved with various programs providing compensation and remembrance to Nazi victims.

Beck gave us a brief history of his political career which began in 1985 when he joined the Green Party. It was soon after, in the early nineties, that he began spearheading major projects in Germany.  Between 1994 and 1998 he played a critical role in ensuring a monthly pension for Jewish Holocaust victims, in lobbying for construction of holocaust memorials recognizing distinct victim groups, and in revoking criminal sodomy provision Paragraph 175.

The removal of Paragraph 175 in 1994 marks a pivotal time for Germany’s tolerance and acceptance of the LGBT community.  The paragraph, created in 1871, was infamous and had undergone several amendments as Germany fell under the rule of different regimes.  There is even a powerful documentary about the paragraph and how it was brutally enforced during the Nazi era.

During the broader period of 1991 to 2004, Beck was also spokesman for the Lesbian & Gay Association of Germany.  In the later of these years, Beck was responsible for bringing LGBT issues to the attention of Parliament.  In 2001 he drafted, and successfully passed, the Civil Partnership Act expanding the rights of same-sex couples to include nationally recognized registered partnerships. As I mentioned in a previous post, the partnership rights have since been expanded upon several times.  The court-won rights expansions can largely be attributed to the Equal Treatment Act of 2006, also sponsored by none other than Volker Beck.

In 2003, Beck was involved in obtaining funding for the Memorial for Persecuted Homosexuals, aspects of which remain controversial.  I saw the monument when I was in Berlin and I, too, had some issues with it. It was across the street from the Memorial to Murdered Jews of Europe and was therefore, in a way, separating being Jewish and being gay. As someone who is both, the disconnect was a bit troubling. Additionally, the placard explaining the memorial (pictured below) was far away. Regardless, I am thrilled that it exists at all.

In addition to Beck’s admirable dedication and achievements within Germany, he never stops promoting LGBT rights as an international concern.  In 2006, he travelled to Moscow to participate in their first pride parade where he intended to give a TV interview but was unfortunately interrupted by a group of anti-gay youth who assaulted him.  The attack did not slow down his activism, however, and he has continued his fight for a broader sense of equality. 

When I attempted to steer our dinner discussion towards the current LGBT tax issues in Germany he briefly confirmed that equal tax treatment is expected to be acheived in the near future but quickly brought the conversation back to international LGBT issues.  Beck relentlessly continues to encourage a global discussion.  Here, he discusses LGBT issues within the context of Uganda, Brazil, the UN and even Dan Savage.

Volker Beck is a great inspiration to me and I admire his drive for international progress, particularly, when so many advancements have already been made in his own country.  He encourages me to remain aware of things like the anti-gay violence taking place in South Africa where just last week a 19-year old lesbian was murdered. Beck’s dedication is a timely reminder to those of us in Washington where same-sex marriage has just been legalized. A battle may have been won, but the war continues. Imagine what the world could be if more people were as dedicated as he is.