The U.S. Supreme Court in June struck down the Defense of Marriage Act (DOMA) provision preventing the federal government from recognizing a legally-valid marriage of a same-sex couple, and the Internal Revenue Service confirmed that such couples are “married” under the Internal Revenue Code. What does this mean for same-sex married couples?
In United States v. Windsor, 570 U.S.__ (2013), the Supreme Court struck down Section 3 of DOMA, which had prevented the federal government (including the IRS) from recognizing a legally-valid marriage of a same-sex couple. The Court didn’t address whether a state may decline to: (1) issue valid marriage licenses to same-sex couples resident in that state, or (2) recognize a legally-valid marriage of a same-sex couple from another state. Although the constitutional right to marry was before the Court in Hollingsworth v. Perry, 570 U.S. ___ (2013), which involved California’s Proposition 8 ban on same-sex marriage, the Supreme Court ruled on procedural grounds only, not reaching the merits. (However, as a practical result of Hollingsworth, Proposition 8 is no longer valid.)
Following Windsor, the IRS confirmed that same-sex couples married under state law are "married" under the IRC, including for income, estate and gift tax purposes. Because of the urgent need for guidance, the IRS provided the same administratively rather than wait for the U.S. Treasury to issue regulations or Congress to amend the IRC. The IRS guidance includes Revenue Ruling 2013-17; FAQs for same-sex couples who are married or in civil union or similar status; and a press release. The IRS guidance confirms that a same-sex couple married under the laws of a state remains married under the IRC, even if they move to a state that doesn’t recognize same-sex marriages. What else does the IRS guidance mean to same-sex couples?
An individual has a set amount (currently $5.25 million) of assets that he may gift over a lifetime, with the unused portion reducing his taxable estate at death. However, gifts between spouses don’t reduce that lifetime exemption, and upon the first spouse's death, her unused exemption carries over to the surviving spouse and no estate tax is imposed. These inter-spousal benefits are now available to same-sex married couples (in fact, this was the issue in Windsor). Any estate plan that a same-sex married couple prepared based on DOMA is now certainly out-of-date, and such a couple should draw up a new plan that meets their tax-saving, lifestyle and other goals.
Same-sex married couples under DOMA had to file separate returns as single individuals. They now must file as “married” for 2013 on, but can file jointly or separately. Generally, filing jointly reduces taxes when there is a large disparity between what the spouses earn (for example, one works and the other is a "stay at home” spouse). However, because of the interplay of single-versus-married tax rates (the so-called “marriage penalty”), filing jointly can result in significantly higher taxes if both spouses are high earners. Filing status is a decision that each couple needs to make based on their unique facts, and upon consultations with their CPA or tax advisor.
The IRS guidanceeliminates the situation whereby a "worker" spouse had imputed taxable income for federal purposes if she provided employer group health insurance coverage and other benefits to her same-sex spouse (such benefits were never considered taxable income when provided to an opposite-sex spouse). These health benefits – and, by extension, the federal taxes based on such imputed income – could easily amount to thousands of dollars.
Under IRS guidance, a married same-sex couple may (not “must”) file for refunds for any open year that the couple was married under state law, but was forced to file as other than married under the IRC because of DOMA. (The deadline for filing a refund claim generally is three years after the return was filed.) Filing a refund claim is – like filing jointly versus separately – a decision that the couple should make with their CPA or tax advisor, considering the dollars at stake and the possibility that the IRS may audit on other issues.
“Sauce for the Goose.”
Sometimes, married status may force tax consequences on a couple that they don’t expect or want—for example, under the rules imputing business ownership from one spouse to another under IRC Sections 267 and 318 and treating certain powers held by a spouse as conferring “disregarded” status to a trust under the IRC’s grantor trust rules. Under DOMA, same-sex married couples could avoid these rules to their benefit because they weren’t married under the IRC. That tax-planning opportunity is now closed. It’s unlikely, however, that the IRS will audit past transactions and force married treatment on a same-sex couple that had previously obtained a tax benefit on the ground that they weren’t married under DOMA (especially given the IRS guidance that a couple may, not must, apply for refunds for prior years in which they filed as separate single individuals.)
Qualified retirement plans, group health plans and other employee benefits with federally-sanctioned tax benefits must treat a worker’s same-sex spouse as a spouse for all purposes. That treatment will apply even in a state that doesn’t recognize same-sex marriages.
Civil Union and Other Relationships
The IRS guidance provides that couples in a registered domestic partner, civil union or similar relationship won’t be treated as married for IRC purposes because they’re not married for state law purposes. The IRS’ position is disappointing (especially if the couple entered that relationship because they were denied married status in the state where they resided), but not unexpected because there was only so much that the IRS can do through administrative guidance. The IRS’ position doesn’t mean that there’s not some kind of due process or equal protection argument for couples in this predicament or that Congress will not amend the IRC to provide that married couples include those in these relationships.