Tax and Financial Planning Considerations for Same-Sex Couples in the Wake of Windsor
The U.S. Supreme Court’s historic ruling in U.S. v. Windsor, striking down §3 of the federal Defense of Marriage Act (DOMA) which defined marriage for federal law purposes as the union between one man and one woman. This decision will have far reaching tax and financial consequences for same-sex married couples. There are many unanswered questions that will no doubt be addressed by the IRS and other federal agencies in the coming months. Below is a brief overview of some of the most likely impacts on your tax and financial situation so that you can begin planning now.
One important caveat to keep in mind is that the Court’s ruling only immediately impacts same-sex married couples living in jurisdictions that recognize such status for legal purposes. The Windsor case does not impact civil unions and domestic partnerships where “partners” are not considered “spouses” and/or the relationship is not considered to be that of husband and wife.
Same-sex couples should be able to file joint federal income tax returns going forward, which generally will save money as deductions and credits once allowed only to heterosexual couples such as the gain exclusion for selling a home and certain child-related tax credits will be available. Same-sex couples also may be able to save money now by changing withholding and estimated tax payment amounts for the remainder of 2013 to take advantage of the more favorable married filing jointly (MFJ) rate.
Conversely, some same-sex couples will pay more in taxes going forward as presumably the only choices as to filing status will be MFJ or married filing separate (MFS). This often is the case where both spouses have high incomes due to the so-called “marriage penalty.”
The Court’s ruling may provide an opportunity to obtain refunds by amending prior year returns to claim MFJ status. Generally one can amend returns for the past three tax years. However, if the IRS makes filing an amended return optional, a couple may not want to take advantage if it would increase their collective tax or trigger or increase the alternative minimum tax (AMT). Couples may not want to file jointly if one spouse currently owes back taxes to the IRS or a state as liability will become joint and several of the assets of both spouses will become relevant to the collection process.
The Court’s ruling also means that a same-sex spouse now will be able to sign for an injured or disabled spouse or for a spouse serving in a combat zone.
Estate and Gift Tax Planning
The Court’s ruling will now give same-sex couples greater flexibility in estate and gift planning. One of the biggest opportunities will be the ability of same-sex couples to utilize the unlimited estate and gift tax marital deductions to make unlimited gifts between them during their lives and to defer estate taxes until the death of the surviving spouse. Certain types of marital trusts previously off-limits also now will be available.
Same-sex couples also will be able to take advantage of the spousal portability of the estate and gift tax unified credit ($5.25 million for gifts made and decedents dying in 2013 or $10.5 million per couple).
In addition, same-sex couples will be able to take advantage of more generous annual gifting allowances available to married couples through “gift-splitting” because it no longer will matter whose assets are being used to make the gift.
Going forward, a spouse will now be able to qualify for survivor benefits. Also, if same-sex spouses divorce, his or her ex-spouse may qualify for Social Security benefits based on that individual’s earnings.
The Social Security Administration will no doubt issue guidance as marital rights to benefits generally have been based on a couple’s current state of residence rather than the state in which the couple were married.
Employee Benefits and Retirement Plans
The Court’s opinion will have a far-reaching impact on employee benefits. Certain provisions dependent on marriage in traditional pension plans and 401(k) plans, as well as IRAs, now must be made available to same-sex couples. A change in the way same-sex couples are taxed with regard to the value of employer-sponsored health insurance will save same-sex couples money. Payroll practices and employee withholding will have to be examined and employers and employees may consider filing for refunds.
Look forward to more information soon as the post-Windsor picture comes into sharper focus, and please contact us as you receive more information from your employers, insurers and financial services providers so that we can discuss your options.
For more information about this, or other tax topics contact your Brown Smith Wallace tax advisor or:
Cathy Goldsticker, CPA, at 314.983.1274, firstname.lastname@example.org
Robin Bell, CPA, at 314.983,1217, email@example.com
Marty Doerr, CPA, at 314.983.1350, firstname.lastname@example.org