Many same-sex married couples will enjoy more rights following the June 26, 2013 U.S. Supreme Court decision in U.S. vs. Windsor. Under federal income tax rules, same-sex couples who are lawfully married in their resident states can now presumably enjoy benefits that had been unavailable to them because of the Defense of Marriage Act (DOMA). Conversely, certain strategic advantages previously enjoyed by same-sex married couples who filed as single individuals under federal tax law, have now likewise ended.
Listed below are several areas where changes should be anticipated in light of the Supreme Court’s recognition of same-sex marriages. Many of these changes will be the result of tax filings; however, due to the complexity of the issue, the many factors become intertwined and expand beyond tax matters.
Filing status. The single biggest item from which benefits or costs will stem is the ability to claim the married or married filing separate status on individual tax returns. Filing status determines the right to many tax provisions, both in terms of access and amount, such as personal exemptions, standard deduction vs. itemized deductions, the adjusted gross income “AGI” amounts at which tax benefits phase-out, income tax rate bracket, as well as signature authorization. For 2013 same-sex married couples recognized under state law at December 31, 2013 will file either as married or married filing separate. Rules for a surviving spouse will presumably follow the same rules as opposite-sex married couples.
Combining income and deductions. The tax impact as a result of filing status depends greatly upon the AGI and other levels reported on a return. Combining income and deductions of each same-sex spouse under a single joint return may or may not work to the advantage of the same-sex married couple. Among many things to consider is the outcome that will be incurred regarding tax floors, ceilings and thresholds. For example, an excluded gain on the sale of a principal residence would have been capped at $250,000 for a single individual; now there is an opportunity to exclude $500,000 if filing as a married filing joint couple. AGI levels impact among other items, itemized deductions, personal exemptions, child tax credits, education credits, IRA eligibility/deductions, net capital gain tax and net investment income tax.
Education-related benefits. Access to a number of education-related tax benefits by same-sex married couples have been limited in the past, due to a student’s status as a non-member of the taxpayer’s family and because of the lower phase-outs that apply to unmarried filers. A Coverdell education savings account, similar to an IRA, can be transferred to a surviving spouse as the result of the beneficiary’s death. It will retain its status, and the spouse may treat the account as his or her own. The assets would not require withdrawal as a result of a transfer, which was previously necessary. Similarly, taxpayers who own an IRA can make penalty-free withdrawals to pay higher education expenses to the extent that the distribution does not exceed the qualified higher education expenses of the taxpayer, the taxpayer’s spouse, or the child or grandchild of the taxpayer or the taxpayer’s spouse. This benefit would now be available to same-sex spouses.
Family Stock Attribution Rules. The Internal Revenue Code contains attribution rules designated to prevent related taxpayers from recognizing losses and other tax benefits otherwise allowed in a variety of transactions. Attribution rules will likely need to take into account a same-sex spouse when considering constructive ownership, direct or indirect, by the spouse, children, grandchildren, or parents, which would apply when determining whether the redemption of stock should be treated as a sale, exchange, or dividend or if there is the ability to recognize a loss.
Social Security Benefits. Presumably, Social Security benefits should be available to same-sex spouses, assuming typical requirements are met. These benefits include survivor benefits and the one-time death benefit for the surviving spouse, as well as a divorced spouse benefit; whereas, the ex-spouse may qualify for Social Security benefits based on the former spouse’s individual earnings.
Employer/Employee Considerations. It will be necessary for many employers to make changes due to the Supreme Court’s decision. Employers will need to update not only employee records, including changes to employees’ filing status and withholding allowances, but also in areas of employee benefits, retirement plans and Cobra/FMLA, to name a few. Employers in or associated with states that allow same-sex marriages will seemingly need to amend employee benefit plans to cover same-sex married spouses, eliminating the requirement for a same-sex spouse to pay taxes on the fair market value of coverage for the employee’s spouse. Additionally, contributions to cafeteria plans and health flexible spending accounts, usually made under a salary-reduction agreement of pretax dollars to pay for the qualified benefits, may now cover same-sex spouse qualified benefits. Furthermore, the spouse of an employee is generally provided the ability to share in an employee’s retirement benefits payable via 401(k) plans and other qualified plans. This ability would appear to extend to a same-sex spouse of an employee. Finally, COBRA benefits, as well as family and medical leave benefits, would be expanded to include same-sex spouses.
Pennsylvania law defines marriage as a civil contract in which a man and a woman take each other as husband and wife. The law provides that same-sex marriages, even if legal elsewhere, are void in Pennsylvania. Pennsylvania law does not allow civil unions. Every state except Pennsylvania in the northeastern United States allows same-sex marriage except New Jersey, which allows civil unions. Presently, the American Civil Liberties Union is challenging Pennsylvania law.
Guidelines for same-sex married couples continue to be uncertain, as many await direction from government agencies. Consequently, at this time, there are many questions stemming from the Windsor decision. Tax planning will be necessary as regulations and procedures evolve. As questions arise, please consult a Schneider Downs tax professional.
© 2013 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.