Last week the Supreme Court narrowly ruled that the Defense of Marriage Act (DOMA) is an unconstitutional deprivation of equal protection. For tax purposes, under DOMA, same- sex marriages were not recognized by the federal government for any purposes including Social Security benefits, filing joint tax returns and claiming the unlimited marital exemption on estate tax returns. Whether the resident state recognized the marriage or the union made no difference.
DOMA was signed into law in 1996 by President Clinton. The first state to recognize same-sex marriages was Massachusetts in 2004. Since then, 12 more states have followed in allowing some form of same-sex union including California. Neither Ohio nor Michigan currently recognizes same-sex marriages or civil unions.
While DOMA is not a tax law, this decision has major tax effects for same-sex couples. In fact, the case which brought this issue to the Supreme Court is an estate tax case where the estate was denied the marital deduction and required to pay estate tax of $363,053 which otherwise would not have been owed.
As a result of the Supreme Court’s decision, there are a myriad of tax related options and benefits now available to same-sex couples. Legally married same-sex couples are now entitled to file joint tax returns which MAY produce a lower total tax bill. They are now eligible to get tax-free employer health coverage for their spouse. From a gift tax perspective, they can now make unlimited tax-free transfers between spouses as well as elect to “split” gifts made to others as made one-half by each to utilize a higher annual exclusion amount. From an estate tax standpoint, they are now eligible for the first spouse to die to get an unlimited marital deduction for amounts transferred to the surviving spouse. And the surviving spouse is eligible to take advantage of the portability of the unused estate tax exemption of the first spouse to die. There are also more beneficial options available for surviving spouses for distributions from qualified retirement plans and IRAs after the death of the first spouse. These are just a few of the many provisions in the tax code related to married couples.
Couples who are affected by this law should consider amending their tax returns for any open years and consider updating their estate planning documents.
The rules and regulation of marriages has long been controlled by the states. While this decision struck down the provisions of DOMA, a federal law, the Court stated that this opinion and holding are confined to “lawful marriages”. At this point, it is unclear how this ruling affects states which recognize domestic partnership or civil unions as opposed to same-sex marriages.
By: Sandi Towns, CPA/PFS, CFP®
William Vaughan Company Blog 