In their recent decision, the Supreme Court found that a portion of the Defense of Marriage Act (DOMA) violated the equal protection clause of the Fifth Amendment of the US Constitution as applied to same sex couples legally wedded under state law.
The decision means that same-sex married couples will now enjoy many federal tax-related benefits, including income tax, estate & gift, tax-free fringe benefits, and more. Employers may need to prepare for major changes in the treatment of employees in same-sex marriages.
Federal Tax Consequences
Couples legally married in states recognizing same-sex marriage are now required to file married-filing-jointly or married-filing-separately tax returns, and enjoy the benefits of such filing statuses, regardless of if their state of domicile recognizes their marriage. In fact, due to the fact that law was not changed, but was instead ruled unconstitutional, legally wed same-sex couples who previously filed using the “single” filing status may be required to file amended tax returns using these statuses. Due to the modified tax brackets, the married couple may now be subject to the “marriage penalty,” resulting in an increases income tax liabiliyt.
Married couples will be subject to modified threshold and AGI floors for items such as medical expenses, ceilings on capital losses, thresholds on itemized deductions, personal exemptions as well as the new investment income tax. Phaseouts will change for American Opportunity Tax Credit and Lifetime Learning Credits, Coverdale Education Savings Account, and IRA withdrawals for education.
Estate & Gift
Same sex couples will now be eligible for the unlimited asset transfers allowed between spouses (previously limited to 14,000). Additionally, the enhanced portability provisions of the estate tax are now available for a serving spouse.
Many employee benefit plans recognized “domestic partners” and provide benefits to the partner. However, under the unconstitutional DOMA law, these benefits were taxed to the recipient because there was no legal exclusion. Post-DOMA, benefits provided under pre-tax plans such as §125 Cafeteria Plans are now non-taxable.
Social Security Benefits
Same-sex couples are now eligible for survivor benefits (if qualified) and divorced couple benefits are also now available.
Since the law was considered to be unconstitutional, the tax benefits were theoretically always available. However, due to statute-of-limitations issues, same-sex spouses will not likely be able to claim refunds for years prior to 2009.
State Tax Issues
20 states and the District of Columbia have laws recognizing same-sex marriage, unions, or domestic partnerships (37 have laws expressly restricting them). Couples who marry in a ‘recognition’ state that move to or reside in ‘non-recognition’ states have significant tax consequences. They will be considered married for federal tax purposes, and unmarried for state purposes.
Aaron Blau, EA, CPA, is a Fellow of the National Tax Practice Institute and vice president of The Blau Company, Ltd. Contact him at firstname.lastname@example.org.