Supreme Court Ruling Narrows Tax Benefit Gap for Gay Couples

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(Bloomberg) The U.S. Supreme Court’s decision to overturn the core of the Defense of Marriage Act will narrow the financial gap between gay and straight couples.

The court’s 5-4 decision yesterday that the law violates the U.S. Constitution’s equal protection guarantee overturns the Bill Clinton-era law that defined marriage as between a man and a woman.

Gay couples who live in states where they can legally marry will be able to file joint federal tax returns, won’t be liable for estate taxes on the death of the first spouse and can receive advantages other married couples have involving health care, retirement savings, Social Security and transfers of property.

“It’s a historic day,” Courtney Joslin, a professor at the University of California Davis School of Law who specializes in family and sexual-orientation law said yesterday. “Married same-sex couples will now be entitled to the hundreds of federal benefits and protections and that will be a tremendous help to many families.”

The Supreme Court considered two cases related to gay marriage. One was a dispute over a California ballot measure banning the practice. The other was a challenge to part of the 1996 federal Defense of Marriage Act, which defines marriage as solely a union between a man and a woman. The legislation is known by its acronym, DOMA.

Estate Taxes
The DOMA case heard by the court hinged on the issue of federal estate taxes. It involved New York resident Edie Windsor, who sued the federal government over a $363,000 estate- tax bill imposed after her spouse died.

The law “places same-sex couples in an unstable position of being in a second-tier marriage,” Justice Anthony Kennedy wrote for the court in the case.

The court stopped short of declaring a constitutional right for gays to marry nationwide, or even ruling directly on California’s voter-approved ban.

There were more than 130,000 married, same-sex couples in the U.S., according to estimates from the 2010 Census. They have the right to marry in 12 states and the District of Columbia.

Such couples’ finances were often complicated by the division between federal and state law in places that recognize their marriages. While they’ve been able to receive employee benefits and file taxes jointly under their state’s laws, the federal government treated them as though they are single.

Federal Benefits

More than 1,000 federal benefits involve marital status. Those who stand to gain the most live in states including New York, Iowa and Washington that recognize same-sex marriages, said Todd Solomon, a partner in the employee benefits practice group at McDermott Will & Emery LLP. The government probably will look to state law to define marriage for the purpose of many federal benefits, he said.

Questions about federal recognition continue for couples who marry in a state that allows same-sex marriage and move to another that doesn’t, Joslin said.

In his dissenting opinion, Justice Antonin Scalia said DOMA avoided “difficult choice-of-law issues that will now arise absent a uniform federal definition of marriage.” He cited the scenario of two women who marry in Albany, New York, and move to Alabama, which doesn’t recognize same-sex marriages. “When the couple files their next federal tax return, may it be a joint one?” he wrote.

Amended Returns
People will need guidance from the Internal Revenue Service and federal agencies on those questions and others such as whether they can amend tax returns and receive refunds, said Lisa Siegel, senior wealth planner at the private bank unit of Wells Fargo & Co.

While Windsor will get her money back because of the ruling, it’s unclear what it will mean for other spouses in a similar situation, Siegel said.

“The IRS better be prepared for a deluge of tax inquiries and amended return filings,” Jonathan Forster, chairman of the wealth management practice group at Greenberg Traurig LLP, said. “There could be big dollars at stake.”

One spouse could have had capital losses on investments in years past that the other spouse’s gains would offset if they could have filed joint federal returns, Forster said. Others may want to amend a gift tax return filed if they made a large transfer of property or assets to their spouse, he said.

IRS Review
“We are reviewing the important Supreme Court decision on the Defense of Marriage Act,” the IRS said in a statement today. “We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.”

One of the most significant benefits for married couples is the ability to pass unlimited amounts of money—for groceries or when adding each other to the deed of a property—without it being considered a taxable gift, Siegel said.

For many same-sex married couples the ruling will simplify the titling of financial accounts and let them consolidate such accounts, said Alexander Popovich, a wealth adviser at JPMorgan Chase & Co.’s private bank unit.

“I know that seems very mundane but it’s a pretty big issue for a lot of clients who are married, who before really had to be very vigilant about keeping accounts separate because they didn’t want unintended tax consequences,” he said.

Defer Taxes
There also are advantages in estate planning. A same-sex spouse would be able to use the unlimited estate-and-gift marital deduction of $10.5 million in 2013 for married couples, or $5.25 million per individual, Siegel said. The effect of the deduction is to defer federal estate taxes owed until the death of the surviving spouse.

Siegel said she already heard yesterday from one same-sex couple who married in New York last year and wanted to review their trust documents. There are types of marital trusts and gifting opportunities that married gay people haven’t been able to use in the past, she said.

“The implications are enormous where at least one member of the couple is a federal employee,” or in the military, Joslin said of overturning DOMA. Many advantages will be extended to opposite-sex spouses including health care, disability and death benefits that same-sex married couples were denied on a federal level, she said.

Social Security
Families also may see the effect when it comes to accessing a spouse’s Social Security benefits, which can be significant if one spouse worked more years or had a higher salary, Joslin said.
Certain spousal provisions, annuities and rollover opportunities in pensions and other retirement accounts will be available to married gay couples, said Jason Rothman, an attorney in the employee benefits practice group at Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

The tax consequences for employee health care benefits will be “huge” as well, Joslin said.
Under DOMA, if people put their same-sex spouses on their insurance plan the value of any employer contribution to premiums usually was deemed taxable income for the worker, which isn’t the case for opposite-sex spouses.

“It can be thousands of dollars for a family,” she said.

Saving Money
The ability to file a federal joint tax return may save some married gay couples money, Kathy Pickering, executive director at the Tax Institute at tax preparer H&R Block Inc., said in a statement. A couple filing a joint return where one spouse has taxable income of $70,000 and the other $30,000 would see a $1,625 tax savings compared with filing two individual returns, Pickering said.

There also may be financial disadvantages from filing jointly, Solomon said. If both spouses earn salaries of $400,000 a year or more, the ruling may mean thousands of dollars in higher income taxes because of the so-called marriage penalty.

Currently, two partners, each earning $400,000 a year in taxable income, pay a lower federal income-tax rate than if they were married. That’s because the top rate of 39.6 percent starts at taxable income above $400,000 for singles and $450,000 for married couples.

If same-sex spouses file jointly under federal law, their combined income is $800,000, of which $350,000 would be subject to the highest federal tax rate.

Same-sex married couples should contact their financial advisers, estate planners and accountants to review their finances and make sure they are taking advantage of the new law, said Siegel of Wells Fargo Private Bank.

“This changes everything,” she said.

—With assistance from Greg Stohr and Richard Rubin in Washington. Editors: Jodi Schneider, Laurie Asseo

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