Wednesday, July 24, 2013

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?

NEW webinar: The Next Step for DOMA: Implications and Opportunities
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.

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