SUPREME COURT RULES DEFENSE OF MARRIAGE ACT UNCONSTITUTIONAL – TAX IMPLICATIONS

Brian Wynne, CPA

The Supreme Court’s June 26th decision in United States v. Windsor has created a great deal of uncertainty surrounding federal taxation of same-sex married couples.  The decision struck down as unconstitutional section 3 of the Defense of Marriage Act (DOMA), which required same-sex married couples to be treated as unmarried for federal law.  This means that in the 13 states (plus the District of Columbia) that currently allow same-sex marriages, the federal government will recognize the marriage.

In the states that recognize same-sex marriage, same-sex couples should immediately be entitled to all of the tax benefits available to married couples.  For example, same-sex married couples can file a joint federal tax return, be eligible for spousal health benefits without imputed income, and take advantage of the unlimited marital deduction for transfers between spouses without incurring gift tax.  Employers no longer have to impute income (and withhold federal income and payroll taxes) on health benefits provided to same-sex spouses.

The biggest area of uncertainty surrounds how the federal government will treat same-sex couples legally married in one state, but living in a state that does not recognize same-sex marriage.  Section 2 of DOMA, which allows states to refuse to recognize same-sex marriages performed in other states, wasn’t challenged here.  In these cases, we must wait for additional guidance from the IRS.

There is also uncertainty surrounding the retroactive nature of the ruling.  A protective claim for refund (an amended return based on expected changes in the tax law) can be filed, but taxpayers should weigh the overall benefits and tax savings relative to the cost of filing.  In some cases, the federal tax may have been lower with each spouse filing as single.  Now that the marriage is recognized, you must file using the married filing joint or married filing separate status—single filing status is no longer available.

There are mechanisms for employers to request refunds of payroll taxes like those withheld from imputed income for same-sex health benefits.  Since the Supreme Court just ruled that the tax is not due, the claims for refund should have merit.  But it may be worthwhile to wait for a short period to see if the IRS issues guidance or streamlined procedures.  Claiming a refund for income taxes withheld would likely require the employee to file an amended return with the married filing status, as discussed above.

Finally, there is uncertainty in states that have allowed for civil unions or domestic partnerships as a way to provide benefits to same-sex couples.  It is unclear whether the IRS is going to equate civil unions or domestic partnerships with marriage to provide the same benefits at the federal level.

Clearly, the IRS has some work to do to provide clarity on several of these issues.  The IRS stated on June 27ththat it was reviewing the decision and “will move swiftly to provide revised guidance in the near future.”  Until then, we will closely monitor the situation and advise as guidance becomes available.

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