The Supreme Court has struck down the Defense of Marriage Act and California’s Proposition 8, awarding supporters of same-sex marriages wins that have major tax implications.
In U.S. v. Windsor, the court invalidated Section 3 of DOMA, which defined marriage as a union between one man and one woman as husband and wife, and spouse as a person of the opposite sex who is a husband or a wife. The case was brought by Edith Windsor, whose same-sex spouse, Thea Speyer, died in 2009. The New York couple married in Toronto in 2007, and at the time of Speyer’s death, New York recognized same-sex marriages from other jurisdictions.
Windsor owed more than $363,000 in federal estate tax on her wife’s estate, since she was not covered by the spousal deduction. She would have owed zero estate tax with the benefit of the spousal deduction.
The Proposition 8 case was dismissed because the court found the sponsors of Proposition 8 did not have standing to appeal a lower court’s ruling against it. The proposition added a provision to the state constitution that declared that only marriages between a man and a woman were valid.
What it means
Some of the implications of the Windsor case are obvious, while others are not. For starters, same-sex married couples will now be able to make decisions regarding filing a joint return that were previously denied them. Both the Congressional Budget Office and the Government Accountability Office have issued studies examining the implications of recognizing same-sex marriages.
The distinction between married and unmarried status is pervasive in federal tax law, even though the code does not define such terms as husband, wife or married. The issue comes into play in connection with income tax rates, the treatment of capital losses, credits for the elderly and disabled, taxation of Social Security benefits, and a number of other provisions.
Marital status also plays a key role in the estate and gift tax laws and in the part of the tax code dealing with taxation on the sale of property, according to the GAO. For estate tax purposes, property transferred to one spouse as the result of the death of another spouse is deductible for purposes of determining the value of the decedent’s estate (the issue in the Windsor case).
Moreover, gifts from one spouse to another are deductible for purposes of the gift tax, and gifts from one spouse to a third party are deemed to be from both spouses equally. Transfers of property from one spouse to another or to a former spouse if the transfer is incident to a divorce are permitted without any recognition of gain or loss. These provisions permit married couples to transfer substantial sums to one another, and to third parties, without tax liability in circumstances in which single taxpayers would not enjoy the same privilege, the GAO explained.