The Rejection of DOMA and Its Impact on Same-Sex Married Couples
The Supreme Court’s recent decision striking down Section 3 of the Defense of Marriage Act (“DOMA”) will have a significant impact on same-sex married couples. Here are some ways that they are affected:
Same-sex couples that the IRS recognizes as married will need to file joint income tax returns (or married filing separately). Note that there is some uncertainty regarding how couples will file if they were married in a state that allows same-sex marriage, but live in a state that does not recognize same-sex marriage. Also, it is not clear if couples registered as domestic partners in states such as California or civil unions in states such as New Jersey can now file a joint federal return. An IRS spokesman said that the agency will “move swiftly to provide revised guidance in the near future.”
Same-sex couples will appreciate the simplicity of filing a joint federal return vs. filing two federal returns. They can potentially have a lower tax liability by filing jointly. Couples who determine that they will benefit from joint filing in prior years can file amended joint returns, generally for the past three years. However, couples in a community property state who were splitting their income between two returns could be in for a rude shock. If they have a significant income disparity, they are likely to pay more tax when they are filing jointly.
Taxable estates are allowed an unlimited marital deduction. No estate tax liability is incurred as a result of the transfer of assets from a deceased spouse to a surviving spouse. Prior to the Supreme Court DOMA decision, transfers to a same-sex spouse could use up the estate tax exemption ($5.25 million currently). Now with the unlimited marital deduction, transfers between same-sex married spouses will not be taxed twice (once when the first spouse dies and once when the second spouse dies). As with income taxes, it is not yet clear how estate taxes will be affected if a same-sex couple marries in a state that allows same-sex marriage, but lives in a state that does not recognize such marriages.
Health Care Benefits
Prior to the DOMA decision, when an employee added a same-sex spouse to a group insurance plan, the employee was required to include the value of the coverage in his or her wages. Now, assuming the marriage is recognized by the IRS, the spousal coverage will not be taxable.
Same-sex married couples can qualify for the “retirement spousal benefit.” Couples with only one person working can receive an extra 50% of the working spouse’s social security benefit while both spouses are living. For couples where both are working, a lower-earning spouse can receive a benefit of up to 50% of the higher-earning spouse’s benefit. This can be helpful if the lower-earning spouse’s benefit would otherwise have been lower than 50% of the higher-earning spouse’s benefit. The rules under social security specifically refer to the marital status in the state of residence, so until the statute is amended or the law successfully challenged, the availability of “retirement spousal benefits” is limited to states that recognize same-sex marriage.
Some marriages end in divorce. The DOMA decision resulted in some favorable effects in the divorce area. First, in a divorce proceeding, the splitting of assets between same-sex spouses is a nontaxable event. Second, alimony paid to a spouse or former spouse under a divorce or separation agreement is deductible by the person making the payment. Third, retirement assets may be divided under a Qualified Domestic Relations Order (QDRO).
The tax issues faced by same-sex married couples are complex, and, as noted above, there is some uncertainty due to pending IRS guidance and the application of these changes to the states that do not recognize same-sex marriage. We recommend that same-sex couples consult their tax and legal advisors to fully understand their personal situation, and to plan accordingly.