The Defense of Marriage Act (DOMA), signed into law by President Bill Clinton in 1996, prevented same-sex couples whose marriages were recognized by their home state from receiving benefits available to other married couples under federal law.
U.S. v. Windsor is the Supreme Court Case that held last week that Section 3 of DOMA was unconstitutional. The case arose because the State of New York recognized the marriage of New York residents Edith Windsor and Thea Spyer, both female, who married in Ontario, Canada, in 2007. When Spyer died in 2009, she left her entire estate to Windsor. Windsor sought to claim the federal estate tax exemption for surviving spouses, which would have resulted in no federal estate tax being due in Spyer's estate. The marital deduction was barred by Section 3 of DOMA, which amended federal law to define "marriage" and "spouse" as excluding same-sex partners. Windsor paid $363,053 in federal estate taxes and filed for a refund, which the Internal Revenue Service denied. Windsor brought a refund suit on the ground that DOMA violates the principles of equal protection incorporated in the Fifth Amendment to the U.S. Constitution.
"The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect in personhood and dignity," Justice Anthony Kennedy wrote in the majority opinion. "By seeking to displace this protection and treating those persons as living in marriages less respected than others, the federal statute is in violation of the Fifth Amendment."
You might think that the decision by the Supreme Court answers the question. Well, it may answer one question, but it creates hundreds of others. How Windsor will affect the federal tax laws is a very murky matter.
After Windsor, if you live in a state where same-sex married is legal, then your filing status for federal purposes is now married. You can file as Married Filing Jointly or Married Filing Separately, if you're so inclined. If you live in a state that doesn't recognize same-sex marriage, your filing status for federal tax purposes does not change.
There are many unknowns:
Will same-sex married couples be able to amend prior year returns?
Will same-sex married couples be required to amend prior year returns?
If amendments are permitted or required, for which years?
What happens if a couple is married in a state or country that recognizes same-sex marriage but on 12/31, their residence is in a state that does not recognize their marriage? Do they file their 1040 as married or as single?
It is unclear what effect the Court's opinion will have in states that have domestic partnerships or civil unions. These may not be considered marriages.
What about 2012 for those taxpayers who are on extension? Will these questions be resolved in time for filing on or before October 15?
Credits, rates and taxation
The distinction between married and unmarried status comes into play in connection with income tax rates, the treatment of capital losses, credits for the elderly and disabled, taxation of Social Security benefits, and many other provisions.
Estate and Gift Tax
Marital status is also important in the estate and gift tax area where transfers to a spouse are not taxable. An unlimited amount of property can pass to a surviving spouse with no federal estate tax.
Gifts from one spouse to another are deductible for purposes of the gift tax, and gifts from one spouse to a third party are deemed to be from both spouses equally. Transfers of property from one spouse to another or to a former spouse if the transfer is incident to a divorce are permitted without any recognition of gain or loss. These provisions permit married couples to transfer substantial sums to one another, and to third parties, without tax liability in circumstances in which single taxpayers would not enjoy the same privilege.
When one spouse dies, the survivor has the option of claiming either his or her own Social Security benefits or those of his or her spouse, whichever is higher. This will be an important change because often couples have a high-earning spouse and a low-earning spouse.
Similarly, a same-sex spouse should be able to collect a spouse's federal or military pension after the spouse dies.
Tax on Health Insurance
If you're straight and married, and your husband or wife gets health insurance through your job, that's a tax-free benefit to you. But people in a same-sex state-recognized marriage previously had to pay federal income tax on that employer contribution - called imputed income - to their partner's health insurance premium.
For spouses who had health-care coverage for their same-sex spouse, not only did they pay tax on the benefit, their employers paid FICA and withheld FICA on those benefits. Will amended 941 filings be required, optional, or not allowed? What will the process be for amending 941s and W-2s?
IRA and Qualified Plan Rollovers
Spouses get special privileges when it comes to rolling over IRAs or 401(k)s when they are named as beneficiaries. On death a spouse can rollover the IRA or qualified plan benefit to his or her own IRA. This permits additional deferral of income tax until the spouse attains age 70-1/2 and must begin withdrawing the minimum required distribution.