On June 26, 2013 the Supreme Court repealed Section 3 of the Defense of Marriage Act (DOMA), paving the way for the recognition of same-sex couples as married for federal purposes. This ruling means, if your state of residence recognizes same-sex marriages, the federal government will as well. The ruling subjects same-sex married couples to the same benefits and disadvantages of opposite-sex married couples in regards to taxes, employee benefits, health care and other federally regulated programs.

What This Means For Your Personal Income Tax Filings:

Filing Status Change:

If the couple is married under state law (the state where they reside) as of 12/31 of the year filing, the couple must file married filing jointly, married filing separately, or head of household. There is no longer an option to file single and have any benefits that may have resulted from this filing. As married individuals the couple must follow the same rules as opposite-sex married couples including:

  1. If one spouse dies during the year the surviving spouses can file married filing joint for the current year and for two tax years after, if they are supporting certain dependents;
  2. If the couple divorces by year end they can file single returns; and
  3. Innocent spouse status may apply if a spouse falls under one of three types of relief: general innocent spouse relief, separate liability relief, and equitable relief.

The couple will face the benefits of increased deductions and income limits for married individuals. They also face the so called “marriage penalty” that occurs when a couple could get better income tax results as single filers than they can as joint filers.

Married Filing Status Items: 

  • Floors for deductions, such as medical expenses (10% of AGI) or miscellaneous itemized deductions (2% of AGI), may be limited more as married filers depending on the difference in combined AGI to that of a single filing.
  • Certain ceilings on deductions from income are lower for married filers, for instance married individuals would only be allowed $3000 of capital losses per year, instead of the $6,000 that the couple would be able to deduct if the couple filed separately.
  • Itemized deduction and personal exemption phase outs that are beginning in 2013, will affect a couple’s combined income earlier than the single filers’ income.
  • The new medical tax in effect will now be on the combined net investment income of both filers instead of the single filer who may not have reached the applicable limits by themselves.
  • Education credits and deduction for expenses paid by one spouse for the other were previously not allowed on the payer’s single return. Now the deduction can be taken because the law allows for deductions to be taken for expenses paid for spouses as defined under federal law.
  • IRA withdrawals to pay for the spouse’s education are now allowed since the couple is considered legally married. 

Prior Year Returns:

We can assist you in determining if it is beneficial to amend prior year returns to reflect a married filing joint status. Returns can be amended for the open periods, generally 3 years prior.

Filing For the 2012 Tax Year: 

Due to the required married filing statuses in effect after the ruling, what status filed for the 2012 tax year may need to be changed?  If the returns for the couple were filed prior to June 26, 2013 the filing status of single for each person will be allowed. If the couple’s returns are on extension and will be filed after June 26, 2013, they must now file a joint return.

What This Means For Your Estate and Gift Returns:

In the federal tax law change that passed at the beginning of this year, certain beneficial estate and gift rules were extended. The following are the beneficial rules that are now applicable to same-sex couples as they are for opposite-sex married couples:

  1. Marital deduction: unlimited deductions are allowed from the gross estate for property passing from a decedent to a surviving spouse;
  2. Estate/gift transfers: transfer of property between spouses are not counted towards lifetime gifting or estate limits;
  3. Portability: because spouses can transfer estates without hitting the exemption limit of $5.25 million per person, some of the exemption amount may not be used on the first spouse’s death. The remaining exemption is transferred to the surviving spouse and added onto their $5.25 million exemption amount for when they pass away;
  4. Gifts: a couple can elect to split a gift amount between the couple, as if each gave half the amount, in order to reduce the impact on satisfying the lifetime gifting exclusion amount.

What This Means For Other Areas:

  • Employee benefits are now extended to cover same-sex spouses the same way they would opposite-sex married spouses.
  • Social security benefits can now transfer and payout to same-sex spouses death benefits and surviving spouses the same as opposite-sex married couples

Planning Opportunities:

This new change in law could lead to some savings opportunities for the future and current tax years. Below are a few of the opportunities that you could take advantage of:

  1. Amending prior year returns to get potential refunds from a married filing joint status
  2. Estate planning techniques that use the exemption and deductions amounts allowed for married individuals
  3. Planning for the future by analyzing the benefits of marriage in terms of tax savings for unmarried couples
  4. Updated and future tax planning techniques using new limits and deduction levels with the new filing status of married individuals