In a landmark Supreme Court case today, United States v. Windsor, the Supreme Court ruled that the Defense of Marriage Act ("DOMA") was unconstitutional. DOMA was signed into law in 1996 and defined marriage as between a man and a woman for purposes of federal law. Importantly, this meant that same sex couples could not file joint tax returns and that a surviving same sex spouse was not entitled to a marital deduction (resulting in higher federal estate taxes).
As a result of this ruling, same sex couples who have married should immediately consider whether they should amend their federal tax returns for the last few years. Consideration should also be given to whether your estate planning documents should be updated to reflect the change in the law.
The ramifications of this ruling are extremely broad, as it can affect immigration laws, the right to receive health insurance, the right to receive a pension, and Social Security. All told, there are about 1000 laws that may be affected.
Importantly, it does not require that a state allow a same sex couple to marry. Accordingly, in states where same sex couples are not allowed to marry, they will have to travel to another jurisdiction to get married in order to receive federal benefits. (It is still slightly unclear at this point whether the state that the couples lives in must recognize the marriage to take advantage of federal benefits - I haven't had time to read the full opinion yet. I will point out that New York allows same sex marriages and New Jersey recognizes same sex marriages from other jurisdictions*. Pennsylvania and Florida have both enacted laws banning such recognition.)
Just a reminder though, strictly from a tax perspective, it does not always make financial sense to get married due to the "marriage penalty". The marriage penalty is a called a penalty because it creates a higher tax on a married couple when both spouses work. However, if one spouse works and the other does not, it does create a substantial tax benefit.
*See post on the Affect of United States v. Windsor on New Jersey Same Sex Couples
Showing posts with label Defense of Marriage Act. Show all posts
Showing posts with label Defense of Marriage Act. Show all posts
Wednesday, June 26, 2013
Tuesday, September 25, 2012
Same Sex Couple Entitled to Federal Estate Tax Marital Deduction?
There was a significant court decision back in June of this year regarding the rights of same sex married couples. The New York Federal Court concluded that the surviving spouse of a same sex married couple is entitled to an unlimited marital deduction for purposes of federal estate taxes. Windsor v. U.S., 109 AFTR 2d ¶ 2012-870 (DC N.Y. 6/6/2012)
Prior to this case being decided (and still the law for most of the rest of the country), when one same sex married partner dies leaving assets to the surviving spouse, only the estate tax exemption amount can pass free of estate taxes. Anything over that would be subject to the federal estate tax. For a heterosexual couple, when one partner dies, everything that passes to the surviving spouse can go tax free. (Although there are some limitations if the surviving spouse is not a citizen.)
The Court in the Winsdor case ruled that the so called "Defense of Marriage Act" (or DOMA) effectively allows for a same sex married couple to be taxed when a traditional married couple would not. They declared that there was no rational basis for this outcome and therefore the law violated the equal protection clause of the Constitution. It should also be noted that the Obama administration flatly refused to support the DOMA. The Attorney General's office usually makes an appearance to support all laws that are being challenged.
While the New York Federal Court made an important ruling, one ruling does NOT make it the law of the land. You should note:
1) The DOMA is still on the books and stands in the way of allowing the marital deduction for people not living in New York.
2) The IRS will continue to challenge these rulings and it will likely go to the Supreme Court before it is finally resolved. In fact, there was an article online on CNN about this very topic today.
3) Not all states allow same sex couples to be married, but if the couple marries in a state that allows it, the couple would then have an excellent argument to try and qualify for this important tax deduction.
While the ruling itself focused on the federal estate tax marital deduction, it can be taken much further. Other potential benefits include the ability to roll over the surviving spouses IRA or 401(k), portability of the unified credit, the ability to file joint income tax returns and the ability to collect Social Security.
Because of the uncertainty surrounding these matters, it will always be best to pay your taxes and request a refund from the government to avoid any penalties. When the IRS denies such payment, which they assuredly will, you will then need to make a decision as to whether you want to take further steps to get legally involved in this fight. For those of you who don't have the inclination to spend a lot of time and money fighting, you should engage in proper estate planning for non-traditional couples.
Prior to this case being decided (and still the law for most of the rest of the country), when one same sex married partner dies leaving assets to the surviving spouse, only the estate tax exemption amount can pass free of estate taxes. Anything over that would be subject to the federal estate tax. For a heterosexual couple, when one partner dies, everything that passes to the surviving spouse can go tax free. (Although there are some limitations if the surviving spouse is not a citizen.)
The Court in the Winsdor case ruled that the so called "Defense of Marriage Act" (or DOMA) effectively allows for a same sex married couple to be taxed when a traditional married couple would not. They declared that there was no rational basis for this outcome and therefore the law violated the equal protection clause of the Constitution. It should also be noted that the Obama administration flatly refused to support the DOMA. The Attorney General's office usually makes an appearance to support all laws that are being challenged.
While the New York Federal Court made an important ruling, one ruling does NOT make it the law of the land. You should note:
1) The DOMA is still on the books and stands in the way of allowing the marital deduction for people not living in New York.
2) The IRS will continue to challenge these rulings and it will likely go to the Supreme Court before it is finally resolved. In fact, there was an article online on CNN about this very topic today.
3) Not all states allow same sex couples to be married, but if the couple marries in a state that allows it, the couple would then have an excellent argument to try and qualify for this important tax deduction.
While the ruling itself focused on the federal estate tax marital deduction, it can be taken much further. Other potential benefits include the ability to roll over the surviving spouses IRA or 401(k), portability of the unified credit, the ability to file joint income tax returns and the ability to collect Social Security.
Because of the uncertainty surrounding these matters, it will always be best to pay your taxes and request a refund from the government to avoid any penalties. When the IRS denies such payment, which they assuredly will, you will then need to make a decision as to whether you want to take further steps to get legally involved in this fight. For those of you who don't have the inclination to spend a lot of time and money fighting, you should engage in proper estate planning for non-traditional couples.
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