The Supreme Court’s decision to strike down section 3 of the Defense of Marriage Act (DOMA) will have a far-reaching tax effect on issues related to income, estates, gifts, employer-provided benefits and divorce. Although the impact is mostly beneficial, several current tax and employer benefit provisions could be negatively impacted, such as in the case of deducting real estate losses, requiring spousal consent for qualified plan payments to a non-spouse beneficiary or electing out of receiving a joint and survivor annuity from an employer pension plan. Further complicating matters are key questions which remain unanswered such as whether or not the effect is retroactive, the status of civil unions (which each state will probably need to address) and whether the decision only applies to same-sex marriages where the couple was married in and continues to live in a state that permits same-sex marriages.
After the ruling, the IRS issued a statement saying that it will “move swiftly to provide revised guidance in the near future.” However, it is not clear how certain issues will be addressed regarding the filing of income tax returns. For example, the Court left intact section 2 of DOMA which reserves the right of each state to define “marriage,” and since federal filing status and claiming a dependency exemption generally relies on individual relationships defined by local law, it is unclear whether the IRS will rely exclusively on state law or adopt rules of its own.
Income, Estate & Financial Planning Impact
Below is a representative list of issues that will be affected by the Supreme Court’s decision which same-sex couples will now need to consider when developing their income, estate and financial planning goals.
- Ability to file a joint federal tax return
- Income tax related phaseout provisions for certain deductions and credits
- Computing the new Medicare surtax on wages, self-employment and unearned income
- Possible reduction or elimination of rental real estate losses
- Combining gains and losses for purposes of computing capital loss carryovers
- Lifetime tax-free (unlimited) gifts between spouses
- Ability to elect gift-splitting
- Estate tax-free (unlimited) transfers to surviving spouses
- Ability of surviving spouse to elect portability of deceased spouse’s IRA or pension plan balance
- Ability to make spousal IRA contributions
- More favorable RMD payout rules (if spouse is more than 10 years younger
- Pre-tax basis of employer-provided health benefits
- Deductible alimony payments (taxable to recipient)
- Tax-free transfers between spouses incident to a divorce
- Social Security survivor’s and spousal benefits
- Certain veteran and military spousal benefits
- Family medical leave rights
- Private pension options such as survivor annuities
Two final notes: First, consideration should be given in certain circumstances to filing amended returns or protective claims to protect prior benefits since there is the issue remains of whether or not the effects of the decision are retroactive. Second, same-sex couples and their advisors will need to constantly review and evaluate the effect of state legislation on many of the issues noted above (where the couple resides, works and may anticipate moving) since the issue now moves from the federal battleground to the states.
We look forward to answering any questions you might have regarding the information discussed in this BLS Important Update. For additional information, please contact us at 302.225.0600 or firstname.lastname@example.org.