In the case Windsor vs. U.S., the Supreme Court struck down the main provision in the Defense of Marriage Act (DOMA) that defined marriage for federal purposes as between a man and women. Generally, the Windsor case was not viewed as a tax case; however, there are profound and far-reaching tax consequences of this ruling. The Supreme Court’s decision now requires the federal government to treat same-sex couples the same as married heterosexual couples if they are legally married in one of the states that permits same-sex marriage. Many questions still remain unanswered, such as how to resolve conflicts between state laws and to what extent these changes will be applied retroactively. There are a number of clear and present issues that impact tax law right now.
There are three main tax effects that result from this ruling. First, there is the right to file a joint tax return. Filing a joint tax return might result in a lower total tax liability for the couple. Typically, this is advantageous when one spouse is a higher wage earner than the other; however, it can actually create higher taxes if both spouses earn similar amounts and are highly paid. Depending on an analysis of the situation, it could be advisable to file amended tax returns or protective refund claims. Favorable situations could be where the couple would have lower taxes as result of filing jointly or where one spouse had capital gains that would have been cancelled out by the capital losses of the other spouse. The general statute of limitations for refunds is the latter of three years from the date of filing or two years from payment.
While the Windsor case itself applied retroactively in granting an estate tax refund, it is currently uncertain how the IRS will apply the decision to individual tax returns; retroactively to all cases where the statute of limitations has not run, only prospectively or only where protective refund claims have been filed.
Second, employers need to make the necessary administrative tax changes and adapt for the new benefits that married same-sex couples now qualify for. Employees’ withholdings might need to be updated to reflect their new filing status. Health coverage provided to same-sex spouses could now be tax-free. Additionally, pension and other retirement plans might also require tax-related administrative changes.
Third, estate planning is subject to major changes as a result of this ruling. Married couples receive favorable treatment on many estate and gift tax provisions. Same-sex couples should update their plans to take advantage of these changes:
- The ability for the estate of the first spouse to die to transfer any unused exclusion amount to the surviving spouse.
- The opportunity to receive a marital deduction for amounts transferred to the surviving spouse.
- The ability to make split gifts.
- The opportunity for either spouse to use the marital deduction to transfer unlimited assets to the other spouse during their life gift-tax free.
While these three issues reflect the major changes of the DOMA ruling, many other more minor tax changes result as well such as the deductibility of alimony.
There are two major caveats to the Windsor ruling. First, there are currently no decisive regulations or laws for same-sex couples who were legally joined together under marriage-equivalents such as domestic partnerships or civil unions. In cases where these situations apply, it might be worth filing protective refund claims in hopes that this issue is resolved in favor of marriage-equivalent relationships. Second, it is unclear how the changes in the law will apply where a same-sex couple work and live in states where one recognizes their marriage and the other does not.
If you think these changes could a have significant impact on your tax situation, give us a call to discuss how we can help analyze your personal situation.