What the Defense of Marriage Act Means for Taxes
The Defense of Marriage Act (DOMA) was recently ruled unconstitutional, paving the way for federally- recognized gay marriage rights. What you might not know is that the case actually began as a tax case (United States v. Windsor). It began when a woman, Thea Spyer died, leaving an inheritance to her wife, Edith Windsor. Because gay marriage was not recognized by the federal government at the time, the inheritance didn’t qualify as a non-taxable bequeath to her spouse. Windsor then sued the U.S. government for a refund of the estate taxes paid on the inheritance and fought it all the way to the Supreme Court. This has now created a world of tax issues as well as possibilities.
With DOMA challenged, same-sex couples are now eligible for many new tax benefits. Previously, for federal tax purposes, a marriage means only a legal union between a man and woman as husband and wife, and the word “spouse” means a person of the opposite sex who is a husband or a wife. In the case, DOMA was declared unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment. This is not only a victory for equal protection under the law but also for states’ rights. However, this is not an affirmation that same-sex marriage should be legal in every state. Currently, it is only legal in these 12 states: Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington State, plus Washington, D.C. The act will only apply to same sex couples in these states. Unfortunately, others will not receive the tax benefits. For starters, same-sex married couples will now be able to make decisions regarding filing a joint return that were previously denied them. Marital status plays a key role in income tax rates, the treatment of capital losses, credits for the elderly and disabled, taxation of Social Security benefits, and a number of other provisions. It also comes into play in connection with the estate and gift tax laws, and part of the tax code dealing with taxation on the sale of property. As in the Windsor case, property transferred to one spouse as the result of death of another spouse is deductible for purposes of determining the value of the decedent’s estate. Gifts from one 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 are permitted without any recognition of gain or loss. These changes permit married couples to transfer substantial amounts of money to each other and to third parties, without tax liability in circumstances when single taxpayers would not enjoy the same privilege. I’ll go into further detail…
Tax Benefits for Married Couples
Marriage can help reduce tax burdens for married couples who file jointly. Depending on incomes, marriage “penalties,” so to speak, can be avoided. If taxpaying spouses have substantially different salaries, the lower one can pull the higher one down into a lower bracket, reducing their overall taxes. Benefits for married couples are as follows:
- Your spouse may be a tax shelter. Negative numbers of one person in a marriage can help both spouses. The spouse who’s losing money may not take advantage of some deductions, including those dealing with the house. In turn, the spouse who’s making money may use the loss as a tax write-off.
- Jobless spouse can have an IRA (Individual Retirement Account) even if he or she doesn’t work. Taxpayer’s who can’t pay into an IRA when single can use the joint income to fund one and potentially put away thousands of dollars for retirement while receiving tax benefits.
- Couples may choose the most valuable benefits from the two plans. A good mixture of benefits from two plans can increase a couple’s tax savings in other ways.
- A married couple can get greater charitable contribution deductions. Having a spouse can raise the limit on these contributions that may be deducted in a year.
- Marriage protects the estate. Under federal tax laws, you can leave any amount of money to a spouse without producing estate tax, so this exemption protects the deceased’s estate until the spouse dies.
- Filing takes less time and expense. If the husband and wife, in this case, partners, have to file one return, there’ s a good chance that it will take less time to put the paperwork together and cost less to have it prepared.
- Tax drawbacks include: full responsibility for every number in a joint return. If your spouse incorrectly reports a number, you are equally liable for the consequences. On the bright side, you are not responsible for your spouse’s mistakes or omissions if they happened in the years before your marriage or if you can prove that you were unaware of them.
Take note– previously, if you were in a same-sex marriage that the state recognized, the IRS still did not, so you did not receive these benefits. If you are one of these people, you must file an amended return and claim those benefits for 2011-2012. But, it only applies if you live in the states where same-sex marriage has been legalized. The IRS is going to come out with regulations and offer guidance on how couples can claim these benefits. You will be eligible to receive these benefits for the past few tax years. If you want to talk more about it, feel free to give Ayar Law Group a call, or send us an email here.