Document Text Content
CCH Tax Briefing
SUPREME COURT STRIKES DOWN DOMA
June 27, 2013
Highlights
Supreme Court Rules
Against DOMA 5 To 4
Joint Returns For Same-Sex
Married Couples
Tax Refunds Possible
“Marriage Penalty” Shared
By Same-Sex Couples
Estate Planning Strategies
Change
Employers Expected To
Revise Benefit Plans
No Nationwide Same-Sex
Marriage Mandate
Inside
Issues At Stake.......................................................2
Supreme Court’s Holdings..................................2
Federal Tax Consequences..................................2
Income Tax Benefits And Disadvantages..........3
Filing Status...........................................................3
Filing Status, AGI Floors And
Threshold Amounts..............................................4
Other Same-Sex Couple Income Tax Issues.......5
Estate And Gift Taxation......................................6
Employee Benefits................................................ 7
Affordable Care Act................................................8
Social Security Benefits.........................................9
Effective-Date Issues.............................................9
Special Report
Post-DOMA Tax Implications Loom Large
In a 5 to 4 decision, the United States
Supreme Court has found that Section
3 of the federal Defense of Marriage
Act (DOMA) violates the equal protection
clause of the Fifth Amendment of the U.S.
Constitution as applied to persons of the
same sex who are legally married under the
laws of their state (Windsor, S.Ct., June 26,
2013, 2013-2 ustc ¶50,400). The majority,
written by Justice Anthony Kennedy,
held that DOMA is unconstitutional as
a deprivation of the liberty of the person
protected by the Fifth Amendment of the
Constitution.
The decision opens the door for same-sex
married couples to enjoy many federal taxrelated
benefits previously available only to
opposite-sex married couples. These include
income tax benefits, estate and gift tax benefits,
taxpayer-friendly employee benefits,
and more. Same-sex couples must now also
deal with circumstances under the tax law
that may create a so-called “marriage penalty.”
Employers must prepare for extensive
changes in the treatment of same-sex
couples. And individuals claiming tax credits
and other provisions under the Patient
Protection and Affordable Care Act are impacted
by the decision.
IMPACT. It is unclear how quickly the
IRS and other federal agencies will react
to the Supreme Court’s decision …or
how quickly same-sex couples may need
to act to protect certain rights. President
Obama has directed all federal
agencies, including Treasury and the
IRS, to revise their regulations to reflect
the Supreme Court’s decision as soon as
possible. Many tax professionals had
been advising same-sex couples to file
protective refund claims in anticipation
of a favorable ruling from the Supreme
Court. This is one of several strategies
that practitioners and taxpayers should
follow up on, as well as filing amended
returns before the applicable limitations
periods expire on back tax years. The
decision to strike down DOMA goes beyond
refunds. Same-sex couples need to
consider many other tax implications.
IMPACT. The Supreme Court did not extend
same-sex marriage nationwide; it declined
to say whether same-sex couples had
a Constitutional right to marriage that
would override state law. But the Supreme
Court’s decision has opened up federal
benefits –including those under the Internal
Revenue Code-- to same-sex couples
considered married under state law. The
Windsor decision leaves many additional
issues unresolved or unclear. Among them
are the status of “domestic partnerships”
and “civil unions” under state law in connection
with federal benefits, the status of
a same-sex couple married in one state but
now residing in a state in which same-sex
marriage is not recognized, and the ability
of married same-sex couples to divorce
without first moving back to a state that
recognizes same-sex marriage.
CAUTION. Immediately after the Windsor
decision was released, questions arose
regarding the impact of residency upon the
recognition of marital status for federal tax
purposes. Will same-sex couples duly married
in one state who now reside in a state
that does not recognize same-sex marriage
be entitled to federal benefits, including
being able to file jointly under the federal
tax laws? …Or will they be required to file
as single under federal law as well as state
law? While President Obama on June
27 expressed the view that same-sex marriages
performed in one state should apply
2
2013 Expert Analysis
to another, he added that “I’m speaking as a
president and not as a lawyer.”
ISSUES AT STAKE
In December 2012, the Supreme Court announced
that it would take up two cases related
to same-sex couples: Windsor, which
arose out of an estate tax dispute between a
surviving partner/spouse and the IRS; and
Hollingsworth v. Perry (CA-9, Feb. 7, 2012),
which addressed whether the equal protection
clause of the Fourteenth Amendment to
the Constitution prohibits California from
defining marriage as the union of a man and
woman. The Supreme Court heard oral arguments
in both cases in March 2013.
IRS Denies Estate Tax Marital Deduction.
In Windsor, a long-time same-sex couple
married in Canada in 2007. They had previously
registered as domestic partners in New
York City, where they made their home. One
spouse died in 2009. Because of DOMA, the
survivor did not qualify for the unlimited
marital deduction under the Internal Revenue
Code and as a result, the executor of the estate
paid $363,000 in federal estate tax that was
not otherwise due. The survivor as executor
and sole beneficiary filed a refund claim under
Code Sec. 2056(a) (under which property of
a surviving spouse generally passes free of federal
estate tax). The IRS determined that the
survivor was not a spouse under Section 3 of
DOMA and, therefore, not a surviving spouse
under Code Sec. 2056(a). A federal district
court found that Section 3 of DOMA violated
the equal protection clause of the Fourteenth
Amendment because there was no rational
basis to support it. The Second Circuit Court
of Appeals affirmed the lower’s court decision,
finding that homosexuals are a protected class
and that Section 3 of DOMA was not substantially
related to an important government
interest and violated Equal Protection.
SUPREME COURT’S
HOLDINGS
Writing for the majority in Windsor, Justice
Kennedy found that DOMA had departed
from the long standing tradition and history
of reliance on state law to define marriage.
The State of New York had recognized
the validity of same-sex marriages, which
resulted in a status that “is a far-reaching
legal acknowledgment of the intimate relationship
between two people, a relationship
deemed by the State worthy of dignity in the
community equal with all other marriages,”
Kennedy wrote. He reasoned that DOMA
sought to injure this class of persons whom
New York sought to protect, and by doing so
violated basic due process and equal protection
principles applicable to the federal government
and was therefore unconstitutional.
“The decision opens the
door for same-sex couples
to enjoy many tax-related
benefits previously
available only to oppositesex
couples.”
DOMA’s operation in practice, Kennedy
continued, was to treat same-sex marriages as
second-class marriages for purposes of federal
law “by imposing a system-wide enactment
with no identified connection to any particular
area of federal law.” DOMA’s principal
purpose was to impose inequality, not for
other reasons such as governmental efficiency,
Kennedy held. Therefore, the majority
found DOMA invalid for lack of a legitimate
government purpose that could overcome
the burden on those within the class whose
personhood and dignity New York had
sought to protect through its marriage laws.
COMMENT: The majority opinion
listed numerous ways in which DOMA
infringed upon the dignity of same-sex
couples. Among these is financial harm
caused by DOMA to children of same-sex
couples by raising the cost of health care
for families by taxing health benefits provided
by employers to their workers’ samesex
spouses. Another example, Kennedy
wrote, is that DOMA denies or reduces
benefits allowed to families upon the loss
of a spouse and parent, benefits that are
an integral part of family security.
COMMENT: Justice Kennedy qualified
the majority’s ruling at the end of the decision,
stating that its applicability was
“confined to those lawful marriages,”
meaning those recognized by the states
that currently allow same-sex marriages.
Kennedy observed that Section 2 of
DOMA, which allows States to refuse to
recognize same-sex marriages performed
under the laws of other States, had not
been challenged in Windsor and continues
to be the law. On June 26, House
Democrats introduced legislation to repeal
Section 2 of DOMA.
California’s Proposition 8. On the same day
the Supreme Court announced its decision in
Windsor, the Justices ruled, 5-4 (but with a different
mix of Justices for and against), to send
Hollingsworth back to the California courts
rather than to directly decide on the constitutionality
of California’s ban on same-sex marriage.
There, the Supreme Court held that the
petitioners did not have the standing to challenge
the lower court’s decision throwing out
Proposition 8, which denied same-sex couples
the right to marry in California. This decision
paves the way for same-sex marriage to begin
again in California sometime in late July.
FEDERAL TAX
CONSEQUENCES
Under federal income tax rules, same-sex
married couples can now presumably enjoy
benefits that had been unavailable to them
because of DOMA. On the other hand, certain
strategic advantages previously enjoyed
by same-sex married couples who filed as
single individuals under the federal tax laws,
have now likewise ended.
COMMENT. Aside from the fact that it
was a federal tax refund claim in Windsor
that triggered the litigation that found
itself before the U.S. Supreme Court, the
opinion focused on Constitutional rights
and privileges, without any technical
CCH Tax Briefing
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June 27, 2013
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discussion of the tax law itself. The Court
judged DOMA for its impact on “over
1,000 federal statutes and the whole
realm of federal regulations.” Very little
was said specifically about federal tax law
beyond that. Nevertheless, the federal tax
law is clearly among those “federal statutes
and regulations” impacted most directly
by the Supreme Court’s holding.
IMPACT. Same-sex couples who were married
under state law for years prior to 2013
now need to decide whether to amend those
prior-year returns still open under the Code’s
statute of limitations, to reflect a change
from unmarried to married filing status.
Same-sex married couples also should consider
updating their estate plans, based upon
the estate and gift tax impact of Windsor.
INCOME TAX BENEFITS
AND DISADVANTAGES
Because of the Supreme Court’s decision, the
same tax benefits and disadvantages faced by
just-married, opposite-sex couples—in changing
from filing as separate, unmarried individuals
to filing as married filing jointly (or
married filing separately)—are now shared by
same-sex married couples. Likewise, however,
those same-sex couples not married under
state law continue to be subject to the same
disadvantages and benefits, and face many of
the same strategic decisions, as unmarried heterosexual
couples under the federal tax law.
CAUTION. As mentioned, above, resolution
is pending on the issue of whether
recognition or non-recognition of a samesex
marriage in the State in which the
same-sex couple currently reside controls
whether the IRS will treat the couple as
married for federal tax purposes. Most
federal agencies have defined marriage in
the past based on a couple’s residency and
not where they were married.
FILING STATUS
A taxpayer’s filing status depends in large
part—if not exclusively in most cases—on
the taxpayer’s marital status. Taxpayers may
be single, surviving spouse, head of household,
married filing joint returns, or married
filing separately. Filing status, in turn, determines
the right to many tax benefits, both in
terms of access and amount. Income tax rate
bracket levels, the standard deduction, personal
exemptions, and the adjusted gross income
(AGI) amounts at which many tax benefits
“phaseout” all hinge upon filing status.
Joint Return Status. Because of the Supreme
Court’s Windsor decision, same-sex couples who
currently are married under state law are presumably
now also barred for federal tax purposes from
filing separate returns as unmarried (or as head of
household, in most cases); they must file either
jointly or married filing separately for 2013 (unless
they are divorced or have a final separation
agreement in place by the end of 2013). The
general rule that has always applied to filing status
now presumably applies to same-sex married
status as well: an individual’s filing status is determined
for the entire year based upon marital
status on December 31 st of that year. The IRS is
expected to issue guidance in this area.
IMPACT. Leading up to the Supreme
Court’s decision, many same-sex couples
filed protective income tax refund claims
using married filing jointly status. A protective
refund claim is a claim filed to
protect the taxpayer’s right to a potential
refund based on a contingent event for
a taxable period for which the period of
limitations is about to expire. Now that
the Supreme Court’s decision is out, full
refund claims, rather than protective
claims, should be filed going forward.
COMMENT. Under current rules, a taxpayer
can sign a joint return if his or her
spouse is serving in a combat zone. In other
limited cases where one spouse cannot sign
the joint return, such as because of injury or
illness, the other spouse may sign the return
and attach a statement explaining why the
spouse was unable to sign. Same-sex couples
who are married under state law are now
presumably allowed these signing benefits.
COMMENT. Because same-sex marriage
is relatively new, the tax implications
of divorce of a same-sex couple are only
starting to manifest themselves.
The Marriage Penalty. Same-sex married
couples who have been denied joint return
status under the federal tax laws prior
to the Supreme Court’s Windsor decision
now need to investigate the effect of joint
return status, both for returns that will be
filed in the future and for prior year returns
still open within the statute of limitations
refund-claim period (generally, but not always,
three years from filing – see this Briefing,
below, for a discussion of this deadline).
The benefits of filing a joint return may
not always be greater than filing separately
as unmarried individuals. Both differences
in tax rate bracket amounts and a variety of
income floors and thresholds used to determine
the right to certain tax breaks come
into play in determining whether some
same-sex couples were better off, income
tax-wise, before the Supreme Court’s decision;
and what they should do now.
IMPACT. Individuals in a relationship
who are not married and who each realize
approximately the same level of
NO NATIONWIDE
EXTENSION OF SAME-
SEX MARRIAGE
The Supreme Court struck down Section
3 of DOMA, which defined marriage as
a legal union between one man and one
woman as husband and wife and defined
spouse as only a person of the opposite
sex who is a husband or wife. The
Supreme Court did not strike down Section
2 of DOMA, which provides that
no state, territory or possession of the
United States shall be required to give
effect to any marriage between persons
of the same sex under the laws of any
other such jurisdiction or to any right
or claim arising from such relationship.
Section 2 was not challenged and, therefore,
was not at issue in Windsor.
CCH Tax Briefing
4
2013 Expert Analysis
income and have similar tax deductions
(at least in amount) have generally been
better off from a tax standpoint filing as
unmarried individuals. However, that
assessment tilts in favor of marriage and
filing a joint return if one partner earns
or deducts the greater portion of any otherwise
combined amounts.
COMMENT. Although much press was
given to “marriage penalty relief” when
the Bush-era tax cuts were permanently
extended by the American Taxpayer Relief
Act of 2012 (ATRA), such relief in fact
only related to equality within the standard
deduction amount and the top portion
of the 15 percent income tax bracket.
Other “marriage penalties” continue to
exist within the tax law depending upon
circumstances. For example, the 33 percent
tax bracket for joint filers in 2013
starts at $223,050 taxable income, while
the 33 percent bracket for single taxpayers
starts at $183,250. If there were no marriage
penalty imposed on higher-income
individuals earning similar amounts, the
33 percent bracket for joint filers would
not start until reaching the $366,500
level, or double that set under the Internal
Revenue Code for single filers.
Married Filing Separately. If same-sex
married couples post-Windsor want to keep
their finances (and liabilities) separate for the
purpose of filing separate returns, they will
generally—but not always—pay more federal
income tax. The rate brackets for “married
filing separately” are higher than “unmarried,
not surviving spouse or head of household.”
Innocent Spouse Status. Married taxpayers
who file joint returns are jointly and severally
responsible for the tax and any interest or penalty
due on the joint return. In some cases, a
spouse will be relieved of this shared liability for
tax owed on a joint tax return. Three types of
relief are available: general innocent spouse relief;
separate liability relief; and equitable relief.
IMPACT. Because of the Supreme
Court’s decision, the three types of innocent
spouse relief are now presumably
available to same-sex married couples.
Same-sex married partners cannot turn
a blind eye to any item that is listed on
a joint return. A decision to file joint
returns retroactively for prior tax years
as the result of the Supreme Court’s decision,
therefore, should include consideration
of the joint and several liability
that would be triggered. Separate return
status would eliminate the issue of joint
liability entirely. The IRS is expected to
issue guidance in this area.
Surviving Spouse Claims. A surviving
spouse computes tax using the same rate
brackets as married couples filing joint returns.
Rules for surviving spouse status for
same-sex married couples now presumably
follow the same rules as for opposite-sex
couples. If a taxpayer is a surviving spouse,
the year the spouse died is the last year for
which the taxpayer can file a joint return
with that spouse. A taxpayer can also qualify
as surviving spouse for two tax years following
the year in which his or her spouse
dies if the taxpayer maintains a household
for certain dependents (a child, adopted
child, foster child, or stepchild), has not
remarried, and filed or could have filed a
joint return with the spouse for the year in
which his or her spouse died.
FILING STATUS, AGI FLOORS
AND THRESHOLD AMOUNTS
The amounts of income and deductions
reported on a return are used by the IRS
in determining whether certain threshold
levels and floors are reached. Those
amounts in turn determine access to a variety
of tax benefits. Some of these floors
or threshold amounts are applied to all
filing statuses uniformly; others vary depending
upon filing status.
IMPACT. Depending upon adjusted gross
income (AGI) and other levels reported
on a return, combining the income and
deductions of each same-sex partner under
a single joint return may or may not
work to the advantage of the couple as a
unit, in contrast to filing as unmarried or
married filing separately.