Federal Tax Law Changes and Opportunities for Same-Sex Married Couples

What you need to know:

As the result of the Supreme Court’s recent decision in United States v. Windsor and a subsequent ruling by the IRS, same-sex couples who are legally married in a jurisdiction that recognizes same-sex marriages will be treated as married for all federal tax law purposes, regardless of whether the state in which they live recognizes same-sex marriages. 

What you need to do:

Same-sex married couples should consult with their estate planning attorneys, accountants and financial advisors to review their federal income tax filing status and their existing estate planning documents, and to determine whether it would be beneficial to amend any prior income, gift or estate tax returns for which the statute of limitations remains open.


Defense of Marriage Act

The Defense of Marriage Act (“DOMA”) was enacted in 1996.  At the time DOMA was enacted, no state recognized same-sex marriages.  DOMA contains the following two operative sections:

  • Section 2 allows a state to refuse to recognize same-sex marriages performed in another state.
  • Section 3 amends the Dictionary Act of the US Code to provide a federal definition of “marriage” as the legal union between one man and one woman as husband and wife, and “spouse” as a person of the opposite sex who is a husband or a wife.  Section 3 applies to more than 1,000 federal laws and numerous federal regulations.

State Laws Regarding Same-Sex Marriages

Currently, 14 states and the District of Columbia recognize same-sex marriages.  These states include: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Washington. 

Based in large part on the Supreme Court’s decision in United States v. Windsor, New Jersey became the most recent state to recognize same-sex marriages, as of October 21st.  Prior to that date, New Jersey law allowed same-sex couples to enter into civil unions, but prohibited same-sex couples from marrying.

Thirty-five states specifically disallow same-sex marriage, but several of those states allow civil unions or domestic partnerships (Colorado, Hawaii, Illinois, Nevada, Oregon, and Wisconsin). 

United States v. Windsor

In United States v. Windsor, the Supreme Court held that Section 3 of DOMA is unconstitutional as a violation of basic due process and equal protection principles.  The practical effects of the Windsor decision are that:

  • The federal definition of “marriage” is no longer limited to only a union between a man and a woman; and
  • The determination of whether a same-sex couple’s marriage will be recognized for federal purposes now depends upon state law.  

But which state law?  The Windsor decision did not address the constitutionality of Section 2 of DOMA, which allows a state to refuse to recognize same-sex marriages performed in another state.  Therefore, the Windsor case left open the question of which state’s law would govern the validity of a couple’s marriage for federal purposes – the state where the couple’s marriage ceremony took place (i.e., the place of celebration) or the state where the couple lives (i.e., the place of domicile).

IRS Ruling Provides Clarity Regarding Which State’s Laws Apply

In response to the Windsor decision, the IRS issued a revenue ruling that is meant to answer the question of which state’s laws will determine the validity of a same-sex marriage.  The ruling provides that, effective as of September 16th, same-sex couples who were legally married in a jurisdiction that recognizes their marriage will be treated as married for all federal tax purposes, regardless of where the couple lives.  For example, a same-sex couple married in Massachusetts, where same-sex marriages are recognized, but living in a state that does not recognize same-sex marriages, will still be treated as married for all federal tax purposes.

The IRS ruling applies to any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a US territory or a foreign country, but does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law that are not denominated as a marriage under the state’s laws. 

As a result of the Windsor decision and the IRS ruling, all legally married same-sex couples must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status. 

The ruling also provides that same-sex couples who were legally married prior to the effective date of the ruling may (but are not required to) file original, amended or adjusted returns, or claims for credits or refunds for any overpayment of tax, for any prior tax year that is still open under the statute of limitations.  Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. 

Estate Planning Issues and Opportunities

The following is a list of some of the possible estate planning actions that same-sex married couples should consider discussing with their attorneys and other advisors: 

  • Review estate planning documents to determine what, if any, revisions should be made in light of the Windsor decision and IRS ruling – note that gifts during life and at death to a same-sex spouse will now qualify for the federal marital deduction.
  • Consider the availability of portability of a deceased same-sex spouse’s unused federal estate tax exemption amount.  
  • Consider gift splitting for annual exclusion or other gifts. 
  • Consider amending previously filed federal income, gift, or estate tax returns to claim the marital deduction, reclaim used exemption amounts, apply gift splitting treatment, elect portability, or seek a refund for taxes paid. 
  • Consider replacing single life insurance policies (which are often obtained by same-sex couples to provide liquidity for the payment of estate taxes upon the death of the first spouse) with second-to-die policies which are generally less expensive and still provide liquidity to children or other beneficiaries after both spouses have died.
  • Review beneficiary designations for life insurance and retirement accounts. 
  • Consider spousal rollovers for retirement assets passing from a deceased spouse.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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