Below is a listing of some takeaways of the more readily apparent tax consequences and implications from this week’s two DOMA decisions (Hollingsworth v. Perry & US v. Windsor) on same-sex marriages, along with a few personal comments mixed in:
- Presently, one state is not obligated to recognize the validity of a same-sex marriage conducted in another state. This may be challenged in future cases. Thus, how couples that come from or move to a state that does not recognize same-sex marriages will be treated for federal tax purposes is uncertain.
- If filing income tax returns as joint yields better tax results, same-sex married couples may want to amend their income tax years for prior open years. Note that married status includes both benefits and penalties under federal tax law, so a pro forma return should be prepared to make sure that better tax results obtain. Some of the income tax benefits of marriage include tax-exempt employer contributions for health insurance coverage of spouses, higher exclusions of home sale proceeds from income, sharing of capital gains and losses on a joint return, roll over treatment for retirement accounts, minimized tax consequences on transfers of property between spouses, and child-related credits. Some of the penalties include higher rates of tax at higher income levels for joint filers, anti-loss provisions for sales of property between family members, application of related party rules to other transactions that might otherwise not be subject to them, lower thresholds for phase-outs of deductions under PEP and PEASE for married persons, and lower thresholds for married persons for Obamacare taxes than for single persons.
- For future years, same-sex married couples in a qualifying state will have to choose between filing jointly, or married filing separately, for income tax purposes.
- Without regard to the merits of the case itself, the failure of the Supreme Court to take jurisdiction is troubling from a Constitutional perspective. It may mean that when a law is passed in a state but the executive branch of that state refuses to enforce it or support it if challenged, the people in the state may have no legal recourse to see that the law is properly enforced.
- Same-sex married persons living in a qualified state should now be able to take advantage of the marital deduction for transfer tax purposes, portability, and other provisions of transfer tax law that are available to married persons such as gift splitting. Again, amended gift and estate tax returns for prior open years may be in order. Unlike income taxes, the availability of married treatment for transfer taxes should almost always be a net positive for affected couples. Nonetheless, there are still some areas of negative impact, including Section 2702 transfers, and definition of family members for buy-sell agreement validity for valuation purposes.
As the cases are further reviewed by commentators, undoubtedly additional consequences will make their way to public consciousness.