The Many Tax Implications of DOMA

The Supreme Court’s decision to strike down the definition of “marriage” as defined in the Defense of Marriage Act (DOMA) is going to have far-reaching tax implications for married same-sex couples. The decision makes it clear that the federal government must recognize a lawful same-sex marriage. However, it left many unanswered questions. Following are just some of those questions:

1. Will the court’s decision be applied retroactively, and if so, to what extent?

2. Since some federal benefits are determined by place of residence, what is the effect on same-sex married couples who marry in one of the states where same-sex marriage is legal, but later relocate to one of the states where it is not legal?

3. Will same-sex married couples be permitted to amend their tax returns for prior years?

4. What if a couple is married in a state that recognizes same-sex marriage, but at December 31, 2013, the couple lives in a state that does not recognize same-sex marriage? Can they file a joint return for 2013?

5. What about decisions made based on filing status that are now too late to correct, such as Roth IRA contributions?

6. Will individuals who filed for automatic extensions for the 2012 tax year have guidance available in time to meet the October 15, 2013, extended deadline?

7. Will the court’s opinion affect same-sex couples in states that sanction domestic partnerships or civil unions?

8. What is the impact on employers with operations in multiple states? Can they apply a single standard or must they apply each state’s rules?

9. Are same-sex spouses entitled to all the survivorship rights given traditional married couples under a tax-qualified retirement plan?

10. Spouses who had health-care coverage, through their employer, for their same-sex partners were taxed on those benefits. Can prior year(s) tax returns be amended to reduce income by those amounts in order to have the tax refunded?

11. Employee Benefit Cafeteria plans can, but are not required to, permit mid-year election changes for certain events. If a plan permits mid-year election changes in connection with the marriage of opposite-sex couples does it have to allow the same change for same-sex couples?

12. What if an employer is based in a state that does not recognize same-sex marriages but has an employee who marries a same-sex partner in a state that does? Which state’s definition of marriage will apply?

And the list goes on.

Same-Sex marriage is legal in 13 states and the District of Columbia but is not legal in the other 37 states. Historically the IRS has deferred to states’ definition of marriage when applying federal tax rules. However if the IRS keeps the state residency policy, then the people in the 37 states where same-sex marriage is not expressly endorsed have gained virtually nothing, tax wise, from the Supreme Court’s decision.

With over an estimated 1,000 federal statutes that now need to be evaluated, and possibly amended to bring them into compliance with the new definition of marriage, looks like Congress will have plenty to keep them busy for years to come.

What do you think?

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This webinar explores the key tax effects of the decision, including filing status, amended returns and protective refund claims, divorce and community property issues, and estate and gift tax planning opportunities. 2 CPE credits. More information.

DOMA Ruling Explained

On June 26, 2013 the Supreme Court ruled the Defense of Marriage (DOMA) act unconstitutional in a 5-4 decision. Specifically, the court struck down section 3 of the act which defines “marriage” as a legal union between one man and one woman and “spouse” as a person of the opposite sex who is a husband or wife. Upon repeal of DOMA, the federal government will now recognize all legal same sex unions in states that allow same sex unions. This aspect of the ruling is quite clear. 

What is not yet clear is the implication this will have on federal tax law and the affect this ruling will have on same sex couples immediately and moving forward. In some ways, this ruling will simplify tax law: same sex couples filing jointly in their state will now be able to file jointly with the federal government as well. Some aspects of the law are less simple and will require further clarification from the IRS as time passes.

Details of the Ruling

Traditionally, the regulation of marriage is an authority granted to the separate states. There are some examples where federal law regulates marriage in order to further federal policy, but generally the federal government seeks to limit the implications of these exceptions. The Supreme Court deemed DOMA §3 unconstitutional because of the far reaching implications of the provision—it affected over 1,000 federal statutes and many regulations.

Furthermore, rather than promote consistency, DOMA treated married couples within the same state differently, imposing restrictions, stigma and disabilities onto a state defined class. Those judges striking DOMA were concerned with the equal protection issues and they argued that the law makes unequal a subset of state-sanctioned marriages in areas ranging from taxes to Social Security and veterans' benefits. It is important to note that the scope of this ruling is confined to only “lawful marriages.”

Immediate Tax Implications

The following are among the tax breaks newly available to legally married same-sex couples:

... the right to file a joint return;

... the opportunity to get tax-free employer health coverage for the same-sex spouse;

... the opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;

... the opportunity for the estate of the first spouse to die to get a marital deduction for amounts transferred to the surviving spouse;

... the opportunity for the estate of the first spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving spouse;

... the opportunity to consent to make "split" gifts (i.e., gifts to others treated as if made one-half by each); and

... the opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.

Many other tax provisions are affected by a taxpayer's marriage status, such as the deductibility of alimony paid to a spouse or former spouse and the availability of the innocent spouse protections.

Planning Tips

Married same-sex couples who filed separate federal returns due to DOMA should consider filing amended returns with claims for refund, where applicable. Filing jointly may produce a lower combined tax than the total tax paid by the same-sex spouses filing as single persons, but this can also produce a higher tax, especially if both spouses are relatively high earners. Tax professionals should calculate for their same sex couple clients their past returns to determine if an amended return will result in a refund.

Married same-sex couples should also amend their estate plans to take advantage of many of the favorable provisions listed above. It is estimated that there are more than 100,000 same sex marriages in the USA. This means that as many as 300,000 amended returns could potentially be required in the near future. Tax professionals should consider filing protective claims for tax returns for which the statute may be about to expire.

Areas for Further Exploration

Because the recent ruling limits its scope to “lawful marriages” it is yet to be seen how the federal government will handle domestic partnerships and civil unions of same sex couples. It is possible that the current ruling will only affect those couples living in states where same sex marriage is legal.

Additionally, the Supreme Court did not strike down section 2 of DOMA which allows states to refuse to recognize same sex marriages performed in other states. Because of this, a couple may be legally married in one state, but living in a state that does not recognize their marriage as valid. It is yet to be seen how the government will view these marriages on a federal level.

Tax professionals will have to wait for the IRS to issues procedures for dealing with these complicated situations.

The Gear Up Editorial Team