With a 5-4 decision, the Supreme Court struck down section 3 of the Defense of Marriage Act (DOMA), which required same-sex spouses to be treated as unmarried for purposes of federal law. The ruling, however, does not mean that states, which currently ban same-sex marriage, now have to permit it.
Though it is not considered tax law, the repeal of this particular legislation means there are new tax consequences. Same-sex couples should look into refiling their taxes, where applicable; the repeal of DOMA could mean more money from Uncle Sam.
With the help of the Wall Street Journal’s MarketWatch section, here are some of the important tax breaks now given to same-sex couples.
“Not being able to file jointly has also meant that many same-sex couples faced larger tax bills than straight couples”, says Kenneth Weissenberg, a partner at accounting firm EisnerAmper, who estimates he and his husband Brian Sheerin paid an additional $5,000 in taxes last year because they couldn’t file as a married couple.
Heterosexual couples can share capital gains and losses and now, same sex-couples can take advantage of these as well. For example, if they sell a home, they can receive a larger exclusion, up to $500,000 compared with $250,000 for an individual, and receive child-related tax credits, among other tax breaks.
Gay couples who filed federal taxes can now look at their jointly filed state level taxes to see how much they overpaid over the years by filing individually at the federal level.
Beware, there are a few caveats to all of this.
Couples who married in one state where gay marriage is legal but moved to another state may face a situation where they are recognized by the federal government but not at the state level.
In most cases, amendments to tax returns are ok if it is up to three years after the filling deadline or up to two years after the taxes are paid. Timelines could vary at the state level.
“Some couples, especially high-earning couples where both spouses are working, could get hit by the so-called marriage penalty. In some cases, spouses are better off filing separately if it increases their chances of qualifying for certain income-based deductions like the medical tax deductions.”
ESTATE PLANNING AND GIFT TAXES
The estate tax is, in fact, at the heart of United States v. Windsor, where the plaintiff Edith Windsor had sued the government to recover $363,000 that she had to pay the IRS after her wife’s death. If the federal government recognized the marriage, she would not have had to pay anything.
“Without federal recognition, many couples were not able to pass assets to their spouses after death, as straight couples could. Instead, spouses inheriting more than $5.1 million in 2012 (raised to $5.25 million this year) were subject to the estate tax.”
In order to avoid double taxation, gay couples would set up trusts to pass on assets to their partners. “Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option that has only been available to straight couples,” says Scott Squillace, an estate planning lawyer based in Boston who focuses on gay couples.
Gay couples will also now be able to share assets without facing a gift tax. “While rarely enforced until one spouse died or was audited, those expenses covered by one spouse could technically be subject to gift taxes if they exceeded $14,000 annually”, says Squillace. This helps couples that don’t equally split mortgage payments and other expenses.
HEALTH CARE BENEFITS
“While more employers are allowing same-sex spouses to be added to their employees’ health plans, it was provided as a taxable benefit—costing those couples an additional $1,069 a year in taxes”, according to a 2007 report by the Center for American Progress, a progressive think tank.
Now, one spouse should be able to move to the other’s health insurance plan with greater ease.
In all, here is a summary of some of the tax breaks newly available to legally married same-sex couples:
- The right to file a joint return, which can produce a lower joint tax than the total tax paid by the same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners);
- The opportunity to get tax-free employer health coverage for the same-sex spouse;
- The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;
- The opportunity for the estate of the first spouse to die to get a marital deduction for amounts transferred to the surviving spouse;
- The opportunity for the estate of the first spouse to die to transfer the deceased spouse’s unused exclusion amount to the surviving spouse;
- The opportunity to consent to make “split” gifts (i.e., gifts to others treated as if made one-half by each); and
- The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for non-spousal beneficiaries.
Same sex couples who filed tax returns under DOMA should consider filing amended returns with claims for refund, where applicable. As seen in the Windsor case, these newfound tax breaks can yield big savings.
- SCOTUS’ Choices (rebeccadmorin.wordpress.com)
- What the DOMA Ruling Means for Same-Sex Couples’ Finances (dailyfinance.com)
- Tax Implications of Getting Married (turbotax.intuit.com)
- How The Supreme Court Decision Will Change Estate Planning For Same-Sex Spouses (forbes.com)
- United States Supreme Court Decides Defense of Marriage Act (DOMA) Case and Prop. 8 Case – SCOTUS Takes Step Towards Acknowledging that Equal Protection Under the Law is Closer than Ever to Being a Reality for all Citizens (whitelawpllc.wordpress.com)
- Complexities of Same-Sex Marriage (joyoftaxlaw.com)
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.