On June 26, 2013, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) in U.S. v. Windsor. Aside from the significant impact on employee benefit plans, the decision has broad tax implications for same-sex couples.
For one, same-sex couples may now file joint federal tax returns if the couple lives in a state that recognizes their marriage. It should be noted, however, that joint returns are not always beneficial. If both partners in a same-sex marriage have high taxable incomes, filing a joint return could result in more taxes being paid. For example, the modified adjusted gross income threshold amounts for calculating the net investment income tax, which applies for tax years after 2012, is $200,000 for taxpayers filing as single, $250,000 for couples filing joint returns, and $125,000 in the case of a married taxpayer filing a separate return.
In light of these considerations, many same-sex couples need to assess the impact of filing a joint return for 2013. These couples should also review whether it would be beneficial to file amended returns for prior tax years for which they were married and for which the statute of limitations remains open.
Another result of the Supreme Court decision is that tax-free employer provided benefits to married same-sex partners that were previously includible in income under federal law are now excludible from income, so refunds can be claimed on this basis. Also, the estate of a partner in a same-sex marriage is entitled to the marital deduction, which means the partner’s estate passes tax-free to his or her spouse. Other consequences of the Court’s decision include married same-sex partners now being eligible to receive federal benefits if his or her partner is a federal employee. Additionally, married same-sex partners are now eligible for social security survivor benefits upon the death of a partner.
The DOMA ruling has also opened a Pandora’s box of tax questions which will be answered by future IRS guidance and court decisions. Six critical unanswered questions include:
(1) It is uncertain whether a same-sex couple that lives in a state that doesn’t recognize same-sex marriages but travels to a state that does recognize such marriages and gets married, will be treated as married for federal tax purposes.
(2) If an individual is married to a same-sex partner in a state like New York that recognizes such marriages, the fair market value of employee benefits received as a result of such marriage are excludible from the non-employee spouse’s income. But, it is unclear what happens if the employee is transferred to a state that doesn’t recognize same-sex marriages. For example, previously tax-free spousal benefits may be converted to taxable non-spouse benefits.
(3) For the current year, it is not clear what happens if one partner in a same-sex marriage has already filed his or her 2012 Form 1040 as single while the other partner is on a valid extension, with the expectation of filing by the October 15 deadline. Assuming they don’t choose to amend both to married filing jointly (MFJ) (which presumably would be allowed), can the spouse on extension file as single or is the spouse required to file as married filing separately (MFS)?
(4) If one partner in a same-sex marriage amends his or her return from single to MFS (e.g. to reclaim imputed income from a spouse’s employment benefits), it is unclear whether the other is also forced to amend his or her return.
(5) It is unclear what will happen in situations where a same-sex couple has a child and one spouse filed as head of household in prior years and received child tax credits and earned income credits. A question to consider is whether the couple is now required to amend as MFJ or MFS and could the spouse who took the credits be forced to return such credits?
(6) From an employer’s perspective, it’s uncertain how the Windsor decision will affect employment benefit plans for employers in different states. For example, will private companies need to consider providing spousal benefits to same-sex married employees regardless of which state the employee lives in?
We are expecting much guidance on these and other issues from the Treasury Department in the coming months and will continue providing updates to you.
While the full impact of the Supreme Court’s decision will not be known for a while, there are important and time-sensitive planning opportunities available now for many individuals and businesses. If you have any questions about how this decision may affect you or your business, please contact your Davis & Kuelthau attorney.