By ruling that part of the Defense of Marriage Act (DOMA) was unconstitutional, the U.S. Supreme Court also set in motion some changes regarding federal income taxes.
The June decision struck down Section 3, holding that same-sex individuals who are married under state law also must be treated as married for income and estate tax purposes.
“The court’s decision will have an impact on many tax laws in states that recognize same-sex marriage,” says Tom Tyler, a partner at Crowe Horwath LLP. “Though being treated as married for federal tax purposes might provide certain tax benefits, it might also result in increased tax liability.”
Smart Business spoke with Tyler about the tax implications of the DOMA ruling and what they mean for employers.
How many states have legalized same-sex marriage, and which ones recognize those marriages from other states?
In addition to the District of Columbia, 13 states allow same-sex marriage: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington. Thirty-five states, including Texas, have banned same-sex marriage, either through legislation or constitutional provisions. New Jersey and New Mexico have no laws either banning or allowing same-sex marriage. Five states — Colorado, Hawaii, Illinois, New Jersey and Oregon — allow civil unions or domestic partnership between same-sex couples, but not marriage.
What affect does the ruling have on federal income tax returns?
Joint returns can be filed for federal income taxes in states that recognize same-sex marriage. If not filing jointly, each spouse will need to file using married filing separately status. Affected taxpayers should review their 2013 filing status and adjust withholding and estimated payments as necessary, keeping in mind the marriage penalty for joint filers.
Generally, the statute of limitations for federal income taxes is three years, so the 2010, 2011 and 2012 tax years are open and returns can be amended. The IRS is expected to issue guidance regarding amending returns under the court’s decision. Taxpayers should wait for this guidance before amending returns.
How have strategies regarding estate and gift taxes changed?
The estate tax exclusion was increased earlier this year to $5.25 million, meaning an estate equal to that amount will not pay any estate taxes provided the decedent has the full $5.25 million exclusion remaining. In addition, the exclusion was made portable such that a deceased spouse’s unused exclusion amount carries over to the surviving spouse upon his or her death for use by the survivor. Therefore, a married couple could shelter up to $10.5 million by simply leaving everything to a surviving spouse. Same-sex couples can now take advantage of these rules as a result of the DOMA ruling. Before the ruling, they couldn’t.
For gift tax purposes, same-sex couples will be able to elect gift splitting, which treats gifts as made half by each spouse. Splitting gifts often allows each spouse to claim the full annual exclusion for gifts made to each recipient, currently $13,000 per person. This allows a spouse to gift up to $26,000 to a recipient without paying gift tax.
What should employers do in response to the DOMA ruling? How does it differ in relation to their state’s legal position on same-sex marriages?
Employers should review the decision with legal counsel to determine its impact. For example, employer-provided medical insurance is now available to same-sex couples on a tax-free basis. Prior to the court’s decision, these benefits were taxable to the nonemployee spouse. Employers might be able to claim a refund of payroll taxes paid on these benefits on a taxable basis, and individuals might be able to claim a refund of income taxes paid on these amounts.
As stated previously, Texas is one of the states that bans same-sex marriage. However, if a Texas business has employees in any of the 13 states or District of Columbia that recognizes same-sex marriage, it could be affected. ●
Tom Tyler is a partner at Crowe Horwath LLP. Reach him at (214) 777-5250 or [email protected].
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