Taxes and the Defense of Marriage Act

Seal_of_the_United_States_Supreme_CourtLast week, in a 5 to 4 decision, the Supreme Court found that Section 3 of the Defense of Marriage Act (DOMA) violates the equal protection clause of the Fifth Amendment of the US Constitution.  The ruling applies to people of the same sex legally married under the laws of their state.

If you didn’t already know, this decision was a tax decision.  It was not a decision stating that same sex couples had a Constitutional right to marriage that would override the state law.

The case that was brought to the Supreme Court U.S. v. Windsor.  This was a same sex couple married in Canada in 2007.  They registered as domestic partners in New York City where they made their home.  In 2009, one spouse died and because of DOMA the survivor did not qualify for the unlimited marital deduction under the Internal Revenue Code.  The executor (the survivor and sole beneficiary) of the estate paid $363,000 in federal taxes that was not due.  This case went through many lower courts until it finally made it to the Supreme Court where it was found that it violated the Constitution.

The ruling opens up many tax advantages and disadvantages.
As in the Windsor case, married couples (if they live in a state that recognizes same sex marriage) will now qualify for the unlimited marital deduction.  But, on the other hand, they will also be subject to the marriage penalty and will not be entitled to other advantages they may have had when filing single.

One of the biggest impacts of the ruling though is in the area of employee benefits.
Because of DOMA, an employer that allowed an employee to add their same sex spouse to the employer’s health plan had to impute the income effect of the benefit and add it to the employee’s taxable wages.  This is no longer the case and may result in refunds of not just income tax but also payroll taxes.

The decision opens up the door to many tax issues that need to be resolved.
The President has asked Federal agencies, including the IRS, to act quickly to revise their regulations.  In the meantime, if you live in a state such as Massachusetts that allows same sex marriage, you may want to amend your tax return to get the benefits you’re entitled to.  As for other states, such as Rhode Island where same sex marriage will be legal this year, we are watching for regulations.