Last month in United States v. Windsor, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional under the Due Process Clause of the Fifth Amendment.
The 5–4 decision is regarded as a landmark case for marriage equality and civil rights under law. By deeming DOMA unconstitutional, the court has returned marriage rights to the states. If a same-sex couple legally marries in one of the thirteen states or five Native American jurisdictions where same-sex marriage is legal, the federal government recognizes the marriage and extends all the rights, privileges and benefits of marriage to the couple.
The tax implications of the DOMA ruling at the federal level are considerable. At the heart of the Windsor case was the estate tax exemption of surviving spouses, otherwise known as the inheritance tax. Because Edith Windsor’s marriage to Thea Spyer was recognized by the state of New York, Windsor applied for the surviving spouse federal exemptions that allow spouses to inherit assets and property from one another tax-free. The exemption can be applied throughout their lives and at the time of one spouse’s death. Because Section 3 of DOMA defined marriage as a union only between a man and woman, Windsor was denied the exemption and faced a $363,053 estate tax on the home she and Spyer shared.
In addition to the rights of survivorship enjoyed by opposite-sex couples through the institution of marriage, same-sex couples may now be eligible for over 1,000 benefits at the federal level that were often denied to them under section 3 of DOMA. Same-sex married couples will now be allowed to file joint tax returns. Their status as lawfully married will also affect, immigration issues, social security tax rates, capital gains and losses, child care tax credits, elderly and disabled credits. Same-sex married couples may also be able to amend tax returns filed previously to reflect their new legal status. The statute for limitations on filing amendments to a tax return is usually three years.
The tax implications of the DOMA ruling are vast and in many instances will benefit same-sex couples that marry legally. However, same-sex couples that marry will find out what opposite-sex married couples have known for years. Namely, that the federal government penalizes married couples by creating tax thresholds that are significantly lower than that of two single earners. If the couple’s combined income exceeds the threshold they will be taxed at a higher rate than two single earners would on the same amount of income or dividends. This part of the tax code is known as the “Marriage Penalty”.
Most same-sex couples, like their opposite-sex counterparts, probably won’t let a higher tax rate stop them from entering into marriage. In today’s society, romantic love has superseded the old ideas of marriage as a contract based on security or social status. While security and status in society still play a role, it is love that drives most people to the alter. However, once couples marry professional tax advice and financial family planning becomes even more vital to creating and maintaining a healthy financial future.
Tom Bulger, CPA specializes in estate tax law, and helping families achieve their financial goals. Give Tom a call today.
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