October 14, 2011
Same-sex couples of New York will not only be spending their time and money planning long awaited weddings and receptions. Many of the newly married couples will have to deal with the issues that many of their previously envied counterparts must contend with. As the federal government continues to defend the Defense of Marriage Act (“DOMA”) which provides that the federal government cannot recognize same-sex marriages, these newly married couples will have choices to make for New York State income taxes. For federal income tax purposes, married filing jointly is still not an option. While DOMA has been held unconstitutional in two courts and the U.S. Justice Department has decided to no longer defend its constitutionality, DOMA continues to be applied administratively by the government.
Many of the newly married same-sex couples will come to find out that the pot of “gold” they were hoping to find at the end of their rainbow will be eaten up by the cost of preparing additional tax forms and reviewing their income and estate tax planning. That is not to say that tax preparers will be preying on the ignorance of these newly married couples but rather, much of the added expense will be attributed to the planning involved in determining what the most tax efficient filing status will be for the couple. Also, as if tax filing was not stressful enough, should they decide to file jointly for New York purposes, they will have to prepare a “dummy” tax return for federal tax purposes. Since New York income taxes start with the federal adjusted gross income, in order to file a joint tax return for New York state purposes, they will need to also prepare a joint return for federal tax purposes so the data needed for the New York tax return is available; only in their case the “joint” federal return will never make it to the mail box. Filing as single taxpayers will no longer be an option for married same-sex couples, they will have to file as married filling separate or jointly for New York and single (or head of household if they have dependent children) for federal.
Filing tax returns for same sex couples may also involve other necessary adjustments between their federal and state tax returns. For example, if one of the taxpayers is providing health coverage through their employer-sponsored program for their spouse, those benefits are added to their wages for federal tax purposes. If the couple gets married, there will have to be an adjustment made to their New York taxable income, as this benefit will not be taxed for state purposes.
Under New York State's estate tax regime, New York now allows unlimited transfers to a same-sex spouse. The spousal right of election to claim one third of a spouse's estate, in lieu of the provisions of the deceased spouse's will, also apply to same sex spouses. In the unfortunate event of the death of a same-sex spouse, the New York taxable estate must be computed as if they were married. The same deductions and elections allowed for different-sex spouses are now allowed for same-sex spouses. Although this is beneficial for the surviving spouse for New York estate tax purposes, estate planning is complicated by the failure of the federal government to recognize the marriage. Until the law reverts to a less generous version at the end of 2012, the federal estate and gift tax laws provide individuals with a lifetime credit against estate and gift tax for the transfer of the first $5 million of assets. Anything over that is subject to a tax at a rate of 35%. While the federal law provides unlimited transfers to surviving spouses, same sex spouses are treated as strangers under DOMA. This means that same sex spouses with more than $5 million in assets will be subject to federal estate tax. For New York purposes, only the first $1 million of assets can be transferred to heirs free of estate tax (New York has no gift tax). All wills and trust agreements should be reviewed in light of the change in marital status.
On July 29, 2011 the New York State Department of Taxation & Finance issued a Technical Memorandum, The Marriage Equality Act, spelling out some of these implications. It should also be noted that the Act applies for tax years beginning in 2011 to all legally performed marriages, whether or not the marriage took place in New York, and is not retroactive. Accordingly, couples who were legally married outside of New York prior to 2011 must still file as single or head of household for all New York returns prior to 2011.
The added complexity of tax filing for same sex marriage and estate tax complexities should not to be viewed as a reason not to get married, it just means that you may need to plan differently and perhaps seek some tax assistance for the preparation of tax returns that you used to be comfortable preparing yourself. There may very well be some gold left in that pot, come April 16.
Trends & Developments – October 2011