On June 26, 2013, the US Supreme Court ruled Section 3 of the Federal Defense of Marriage Act (DOMA) was unconstitutional as it violates the equal protection clause of the Fifth Amendment of the US Constitution as applied to persons of the same sex who reside in states that recognize same-sex marriages.
This decision entitles same-sex married couples many federal tax related benefits. These benefits will have an impact on their income tax filing status, estate and gift tax planning, employee benefits, and ability to inherit social security benefits, among others.
The decision, however, did not legalize same-sex marriage in all states. It left the decision to define marriage to each state. It is unclear whether a same-sex couple legally married in one state who now resides in a state that does not recognize same-sex marriage will be entitled to federal benefits. In the past, most federal agencies have defined marriage based on a couple’s residency and not where they were married.
Income Tax and Employee Benefit Implications
Same-sex married couples who reside in a state that recognize same sex marriage must now file their federal income tax return as either married filing joint or married filing separately for 2013. Prior to the ruling, same-sex married couples were denied joint filing status of their federal income tax return.
Under DOMA, employers that allow an employee to add his or her same-sex spouse to their health plan had to include in income the fair market value of the health coverage provided to the same-sex spouse.
The Supreme Court’s decision opens the window for employees to apply for refunds of taxes paid by employees on income imputed to employees of same-sex married spouse and refunds of payroll taxes paid by employers on that income.
While the ruling is effective as of June 26, 2013, federal tax laws may consider same-sex couples married retroactively to the date of their marriage pursuant to their state law. This brings ups a few issues to consider:
- Can same-sex couples amend their previously filed returns claiming joint return status?
- Are they required to amend prior year returns with joint status even if their taxes were lower overall under unmarried individuals?
We will need further clarification and guidance from the IRS.
Estate and Gift Tax
Prior to the repeal of DOMA, same-sex couples could not take advantage of the estate tax unlimited marital deduction and portability. DOMA also precluded same-sex spouses from the benefit of allowing spouses to make gifts to each other.
The unlimited marital deduction allows the decedent to transfer an unlimited amount of assets to his or surviving U.S. citizen spouse with no estate tax ramifications. Prior to the repeal, the surviving spouse of a same–sex couple would inherit the assets on an after-tax basis.
Portability allows the estate of a surviving spouse to utilize the unused portion of the estate tax applicable exclusion amount of his or her predeceased spouse. For 2013, the lifetime exclusion amount is $5,250,000 per person. If a spouse passes away without using their full lifetime exclusion, the unused portion may be transferred to the surviving spouse.
Prior to the repeal of DOMA, only opposite-sex married couples could take advantage of portability as part of their estate planning.
Under DOMA, only opposite-sex married couples were allowed to split gifts to take advantage of doubled annual gift tax exclusion ($28,000 for a married couple). In addition, transfers between spouses (where both are US citizens) were allowed an unlimited amount. With this repeal, same-sex couples married under state law are also afforded this benefit.
More Guidance to Come
While the President has directed all federal agencies, including the Treasury and the IRS, to revise their regulations to reflect the Supreme Court’s decision as soon as possible, it is unclear how quickly the IRS and other federal agencies will react.
In the meantime, same-sex married couples who reside in states that recognize same-sex marriage should consult with their estate planning attorney to review their estate plan. In addition, they should consult with their accountant on the need to amend their income tax returns.