The Supreme Court’s ruling in the case of Windsor v. United States, holding part of the Defense Of Marriage Act unconstitutional, will have important tax repercussions.
The Windsor case is a federal estate tax case. As a result of the decision, the amount Edith Windsor inherited from her wife, Thea Speyer will not be subject to federal estate tax because of the marital deduction, a provision of the Internal Revenue Code allowing property to pass between spouses free of estate or gift tax.
There are many other tax provisions tied to a taxpayer’s marital status, with the most apparent being the estate and gift tax and the income tax. The effect of the decision will be to make those provisions applicable to all married couples living in states that recognize same sex marriages. From now on, gifts between same sex spouses may be made without the threat of the imposition of a gift tax. If one member of a married couple decides to make a gift to children or other individuals, that gift can be ‘split’ between the spouses, a way to increase the amount that can be given using the annual gift tax exclusion. And, as in Windsor, the federal estate tax will not be imposed on spousal gifts made at death.
For income tax purposes, spouses may file joint returns. For most couples, the ability to file joint income tax returns will be helpful to them financially. The down-side of this is the inability to file ‘single status’ returns if the total tax payable in a joint return is more than that status. If a couple has two high-earning individuals, the joint return may result in a higher total tax payable, known as the marriage penalty. This is the same as is the case for any married couple. A married couple may want to review their 2013 estimated withholding and estimated tax payments in case the total taxes paid will be close to what is actually owed with the return.
A couple will generally have a much easier time completing their income tax returns each year, with no need to determine which parent can take the dependency deduction, how itemized deductions should be allocated, and on which return certain credits can be taken. The simple issue of whether a person is a ‘head of household’ will no longer be a concern.
One question is whether a couple will be able to amend prior returns (up to the three year statute of limitations on amending tax returns). Although the Court did not address this issue, it will likely be possible to file an amended return with a claim for refund. Generally, 2010 returns and later will likely be subject to amendment.
These federal tax benefits are available to spouses who live in a state that recognizes same sex marriage. For married couples who live in a state that does not recognize same sex marriage, the tax situation is more complicated and will likely depend on how the federal government interprets the Court’s decision. It is possible that federal tax benefits will be granted to couples who were married in a state that recognizes same sex marriages, regardless of the law of the state in which the couple resides. Another issue is whether the domiciliary state will give ‘full faith and credit’ to a valid marriage entered another state.
There are other tax matters that will be subject to change as a result of the Court’s invalidation of DOMA. For example, spouses have special rights with respect to inherited IRA’s, including the ability to roll the IRA over to his or her own account. Certain employee fringe benefits available to spouses on a tax free basis, will no longer be subject to tax.
The tax issues will continue to be dealt with as the federal agencies release guidance to taxpayers, employers and employees. We will keep you informed.