U.S. Supreme Court Strikes Down DOMA
On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, struck down Section 3 of the Defense of Marriage Act (DOMA), which had deemed all same-sex marriages invalid for purposes of federal law. The Windsor decision effectively changes the definition of “spouse” in over 1,000 federal statutes and at least as many regulations. Any individual in a same-sex marriage should carefully review his or her tax situation in light of the decision. In addition, employers should review the decision’s potential impact on their benefit plans.
The Ruling
The Windsor case involved a same-sex couple whose marriage had been legally recognized in their state of domicile. One of them died, leaving her entire estate to the other. On its federal estate-tax return, the estate claimed the unlimited marital deduction for property passing to a surviving spouse, but the IRS denied the deduction pursuant to Sec. 3 of DOMA and assessed over $350,000 in estate taxes. Windsor, the estate’s executor, paid the taxes but filed suit, challenging Sec. 3 of DOMA as unconstitutional. The federal district court ruled in Windsor’s favor, and both the federal appeals court and the U.S. Supreme Court affirmed.
Limited Reach of the Decision
Significantly, the Windsor decision did not address Sec. 2 of DOMA, which permits states to refuse to recognize same-sex marriages recognized in other states. As a result, at this time, any individual in a same-sex marriage who moves from a state where that marriage is legally recognized to one where it is not runs the risk of losing any rights newly acquired under Windsor.
Another outstanding issue concerns the federal legal status of arrangements such as “domestic partnerships” or “civil unions” — as opposed to state-sanctioned “marriages.” What status these designations will have after Windsor remains to be resolved on a state-by-state basis.
Income-tax Issues
As a general rule, an individual’s filing status is determined as of December 31 of the tax year. Same-sex couples whose marriages are sanctioned after the Windsor decision are presumably required to now file either as married filing jointly or married filing separately, and they will no longer be allowed to file as “single.”
Couples affected by the Windsor decision will want to consider carefully whether they may obtain refunds by amending any prior federal returns to show that they were legally married. Amended return(s) must be filed within the applicable statute of limitations.
Couples should be aware that the tax effects of the two filing statuses available to married persons — married filing jointly and married filing separately — can vary widely. Additionally, it’s important to know that where two individuals file as married filing jointly, each is jointly and severally liable for any taxes, interest, and penalties ultimately deemed owing.
Those whose marital status for federal tax purposes has recently changed (or is about to) should consider the potential effect on several areas of their tax returns, including:
- Various deductions and credits (including deductions for individual retirement account (IRA) contributions and credits for higher education expenses)
- Capital gains and income-tax rates
- Medicare surtax on net investment income
- Itemized deduction and personal exemption limitations
Estate Planning
With the increase in the federal estate- and gift-tax exemption to $5.25 million in 2013, relatively few couples’ estates will be affected by the Windsor decision. However, those whose estates are sufficiently large will want to reconsider their estate plans in light of (1) the availability of the unlimited marital deduction for both gift- and estate-tax purposes and (2) the portability of the estate-tax exemption.
Also of interest to many married taxpayers are the favorable rules for the spousal beneficiaries of IRAs to delay and “stretch out” required minimum distributions (RMDs). Specifically, surviving spouses who are named as beneficiaries of their spouse’s IRAs may choose to either directly roll over those IRAs or else treat them as their own — thereby potentially enabling them to avoid taxable lump-sum payouts, to take advantage of a more friendly schedule for RMDs, and to choose their own beneficiaries in order to maximize their tax deferral.
Benefit Plans
The DOMA ruling will affect employee benefit plans in several areas. For example, any health care coverage provided by employers to their employees’ same-sex spouses should no longer be treated as taxable income. In addition, such spouses should be treated as qualified beneficiaries for purposes of the COBRA continuation rules.
Sponsors of qualified retirement plans should assess the impact on their plans, including the application of the tax law’s spousal consent, qualified joint and survivor annuity, and RMD rules to employees in same-sex marriages. The IRS and U.S. Department of Labor are expected to provide additional guidance to plan sponsors regarding plan amendments and other issues.
The DOMA decision presents a wide range of issues to consider. Contact us if we can be of assistance.