In June, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act of 1996 (DOMA), which defined marriage as the union of a man and a woman. The 5-4 decision bolsters the federal benefits available to same-sex married couples. In their written opinion, the court’s majority agreed, stating that DOMA “violates basic due process and equal protection principles applicable to the Federal Government.”
Because of the way the court addressed the issue, the ruling initially allowed only same-sex married couples who live in one of 14 states that recognize the marriage to be afforded the same rights as opposite sex couples. However, in August, the IRS issued Revenue Ruling 2013-17, which states that all legally married, same-sex couples will receive the same federal tax treatment regardless of the state of residency.
Under the ruling, same-sex couples will be treated as married for all federal income tax purposes. Some implications:
• As of Sept. 16, all legally married same-sex couples must file federal tax returns jointly or married filing separately. Filing two returns under the single status is no longer allowed. In many cases, the marriage penalty some opposite-sex couples face will actually lead to more taxes being paid by the same-sex married couple.
• The ruling applies to all federal income tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit. However, while federal tax law recognizes the marriage, many states do not. In this situation, the same-sex married couple will file a joint tax return for federal purposes but redo the tax return under the single filing status for the state purposes.
• In addition, same-sex married couples now will receive the same treatment for gift and estate taxes as any other married couple. This will allow wealthy couples to provide spousal support without having to file gift tax returns and to leave their estates to each other without fear of estate taxes at death.
• Also, the new recognition will allow a surviving spouse better options after inheriting the deceased spouse’s retirement assets. This will be in line with the same choices that opposite-sex married couples currently have.
As of this writing, Social Security has not granted the same-sex married couple the same planning opportunities as opposite-sex married couples. Unlike the IRS, the Social Security Administration follows the law of the state of domicile. For instance, a same-sex couple that was married in a state where the marriage is legal but moves to a state where the marriage is not recognized will lose any Social Security recognition in the new state. It is likely that the Social Security Administration will change this policy to provide recognition regardless of the state of domicile but until it does, this could be a very complicated issue for planning and residency purposes for same-sex, married retiree couples.
With the Supreme Court ruling and IRS regulations, planning for same-sex married couples has become much easier but there are still many complications and for those in need, seek an adviser with an expertise in these issues.
Life is a journey; plan for it.