The U.S. Supreme Court’s June 26 decision in United States v. Windsor declared unconstitutional §3 of the federal Defense of Marriage Act (DOMA), which provided that, for all federal laws and regulations, “marriage” was limited to a union of one man and one woman, and “spouse” referred only to a person of the opposite sex. Prior to Windsor, the federal government did not recognize same-sex marriages for purposes of receiving federal benefits or for federal taxation.
Windsor has achieved great prominence as a landmark case affecting the status of same-sex marriages, it was, at its heart, a tax-refund case. At issue in Windsor was the availability of an estate-tax deduction to a decedent’s estate for a bequest to her same-sex spouse. Subsequent to
Windsor, the IRS has issued guidance on the tax treatment of same-sex marriages and dependents and, in some cases, the right to file refund claims for previously paid taxes. The tax impact of
Windsor is pervasive.
The Supreme Court’s ruling in
Windsor significantly will affect the federal income taxation of married same-sex couples. IRS guidance released on Aug. 29 established that the federal government will recognize same-sex marriages for federal tax purposes regardless of recognition (or lack thereof) in the state or jurisdiction where the couple resides. All taxpayers in same-sex marriages, therefore, must file as “married” on any federal tax return filed after Sept. 15. The availability of the married filing jointly filing status will generally result in lower taxes for same-sex couples.
The Windsor decision also will affect estate and gift tax liability. The unlimited marital estate tax deduction now will apply to amounts inherited by a surviving same-sex spouse. Same-sex couples now will be able to make unlimited lifetime gifts to each other without gift tax. Any unused portion of the estate tax exemption ($5.34 million for 2014) may be transferred to the surviving same-sex spouse.
Additionally, the Windsor decision will affect the taxation of certain workplace benefits, such as employer contributions to health insurance plans. Prior to
Windsor, an employee was subject to taxation of employer-provided health coverage of a same-sex spouse (or the spouse’s children). Based on IRS guidance, such amounts will be nontaxable if provided by the employer, and any employee share of such coverage may be paid for with pre-tax dollars under the employer’s cafeteria plan.
Married same-sex couples may file amended returns open under the statute of limitations (for most taxpayers, 2010, 2011 or 2012) if doing so would result in tax refunds. Additionally, employers and employees may file refund claims for overpayments of FICA and income tax resulting from the change in taxability of employee benefits afforded same-sex spouses (and their children) for such open years.
Because of variations in state laws, the Windsor decision and related IRS guidance have complicated some issues for same-sex couples. The IRS has stated that the “state of ceremony” determines marital status for tax purposes, so that legally married same-sex couples will be treated as married regardless of whether their state of domicile recognizes same-sex marriages.
This creates a lack of congruence between federal and state tax returns for same-sex married couples living in states that impose income tax but do not recognize same-sex marriage. While most states use the federal return as a starting point for determining state taxation, same-sex couples residing in a state that does not recognize same-sex marriage may have to file their state tax returns as single individuals.
The IRS has not provided guidance on the status of certain civil unions and registered domestic partnerships. State laws can vary as to whether such unions or partnerships are equivalent to marriage, causing inconsistencies and difficult legal interpretations for certain taxpayers.
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