In recent news, New York became the 6th state (excluding Washington, D.C.) to legalize same-sex marriage, making it the largest state to permit this law. As many people in the gay and lesbian communities are ecstatic about the new change, many are hesitant to marry because of the complicated financial situation they could endure. So what are the legal implications of a state allowing same-sex marriage, while federally, it is still illegal?
In 1996, the federal Defense of Marriage Act (DOMA) was enacted in the U.S., outlining that a marriage is only constitutional between one man and one woman. Consequently, federal agencies, including the IRS consider DOMA the law, despite new state regulations. This means same-sex spouses are not entitled to social security benefits, cannot sponsor each other for citizenship and are not covered by the law that entitles a spouses’ right to a company-sponsored retirement account.
In states that allow same-sex marriage and domestic partnerships, spouses can file joint state income tax returns, yet they cannot file a joint federal return because of DOMA. This means two separate tax returns are required, resulting in extra tax preparation, which can be a hassle for same-sex marriages. In addition, if spouses are making unequal incomes, filing as single will result in a higher federal tax bill. However, if the spouses are both making a large sum of money, it may be less expensive to file as single than as married. Essentially it is harder, longer, and more costly to file tax returns for same-sex marriages because everything needs to be done twice for state and federal purposes.
Both federal and state estate tax laws allow for spouses to transfer as many assets as they want while living or deceased without paying any estate or gift taxes (only if the spouse is a U.S. citizen). DOMA forbids same-sex couples of the federal spousal exemption. However, federal law allows for an individual to transfer as much as $5 million to non-spousal beneficiaries, untaxed. Still, state estate taxes can be exceptionally high and marriage can reduce these taxes.
In the states where same-sex marriage is legal, spouses are by virtue, legal heirs of each other. Even domestic partnerships or civil unions recognize the right to inherit from each other. However, it is still important to have a will in place because without one, state law can determine how your belongings are distributed. If the state only allows domestic partnerships or civil unions, it may be an extreme burden on your loved ones if you did not have a will because the state could take control of your belongings.
Joint Property and Tenancy By Entirety
Under federal tax law, joint property held by spouses are owned 50/50. If the joint property is shared by individuals who are not legally married, it is owned 100% by the first to die. This means, if one same-sex partner dies, the survivor must show how much he/she contributed to the property. Fortunately, for joint property any two people can hold a property or financial account with the right of survivorship. Both account holders have access to their assets over their lives and when one dies, the other becomes sole owner of the assets. Despite its convenience, it exposes unlimited liability on both account holders. Let’s say someone sues one of the property account holders and wins – the creditor may be able to force the sale of the house and claim half the value!
However – in 30 states, same-sex couples can claim tenancy by the entirety. This allows for spouses to own property as a single legal entity. As a result, one spouse cannot try selling the house without the other spouse’s permission, plus one spouse’s creditors cannot legally sell the house (it has to be both spouse’s creditors).
Divorces are always difficult processes. Whether through a traditional or same-sex marriage, a divorce is hard to execute without any overarching problems. A common dilemma that faces same-sex marriages is trying to get divorced in a state where the law requires residency and you are not a resident to the state where you married. Many courts refuse to grant divorces to those who are not residents of the state they were married. In addition to the difficulty of actually obtaining the divorce, taxes can be exorbitant for same-sex couples following a divorce. Federal law allows for property to be transferred between spouses incident to divorce with no tax liabilities and even makes special provisions for the transfer of retirement savings accounts like 401(k)s. However, DOMA does not recognize same-sex couples as married, so this law does not apply to same-sex marriages. Due to these complications, it may be better to sign a pre-nuptial agreement to avoid any additional taxes following a divorce.
Maryland vs. Washington D.C.
According to Maryland Family Law, Section 2-201, “only a marriage between a man and a woman is valid in the state.” Thus, same-sex marriage is not recognized, however, domestic partnerships do have several benefits. Among them include, hospital visitation rights, joint ownership of vehicle, coverage of one domestic partner under health insurance for another partner, and joint responsibility of a child. There have been several attempts to legalize same-sex marriage in Maryland, yet the Family Law has upheld against every case.
On December 19, 2009 same-sex marriage was legalized in the District of Columbia. As of now, D.C. is the only jurisdiction in the United States below the Mason-Dixon Line to allow same-sex marriage. The process leading to the legislation of same-sex marriage is fairly more progressive than where Maryland stands right now. Prior to the new law, domestic partnerships were receiving rapidly more benefits. In 2004, the Department of Motor Vehicles Reform Amendment Act exempted domestic partners from the excise tax for title transfer of any vehicle. In 2006, domestic partnerships were allowed to file joint tax returns, emulating similar benefits of a traditional marriage.
As we see more states become increasingly open-minded about same-sex marriage, we may hear more discussion about repealing DOMA. In the event DOMA is repealed, same-sex marriages would be no different than a marriage between a man and a woman.
This article is by no means a method of advocating or opposing same-sex marriage. This information is based on mere facts and laws regarding the status of same-sex and traditional marriages in the United States. If you would like further information or discuss tax, estate or other time of legal planning, please call JDKatz, P.C. at 301-859-3562.
IRS on Same-Sex Marriage
Same-Sex Marriage States
More Tax Complications With Same-Sex Marriage