The U.S. Supreme Court’s decision to overturn the core of the Defense of Marriage Act will narrow the financial gap between gay and straight couples.
The court’s 5-4 decision that the law violates the U.S. Constitution’s equal protection guarantee protected by the Fifth Amendment overturns the Bill Clinton-era law that defined marriage as between a man and a woman.
Gay couples who live in states where they can legally marry will be able to file joint federal tax returns, won’t be liable for estate taxes on the death of the first spouse and can receive advantages other married couples have involving health care, retirement savings, Social Security and transfers of property.
“It’s a historic day,” said Courtney Joslin, a professor at the University of California Davis School of Law who specializes in family and sexual-orientation law. “Married same-sex couples will now be entitled to the hundreds of federal benefits and protections and that will be a tremendous help to many families.”
The Supreme Court considered two cases related to gay marriage. One was a dispute over a California ballot measure banning the practice. The other was a challenge to part of a 1996 federal Defense of Marriage Act, which defines marriage as solely a union between a man and a woman. The legislation is known by its acronym, DOMA.
The DOMA case heard by the court hinged on the issue of federal estate taxes. It involved New York resident Edie Windsor, who sued the federal government over a $363,000 estate- tax bill imposed after her spouse died.
Same-sex spouses haven’t been treated as being married for federal tax purposes, meaning when one spouse died their assets didn’t transfer to the survivor free of estate taxes until their own death.
The court stopped short of declaring a constitutional right for gays to marry nationwide, or even ruling directly on California’s voter-approved ban.
There were more than 130,000 married, same-sex couples in the U.S., according to estimates from the 2010 Census. Same-sex couples have the right to marry in 12 states and the District of Columbia.
Such couples’ finances were often complicated by the division between federal and state law in places that recognize their marriages. While they were able to receive employee benefits and file taxes jointly under their state’s laws, the federal government treated them as though they are single.
“The bundle of rights and the disparities that people will get in states where they are recognized, versus where they aren’t, will get much bigger” as a result of the ruling, said Todd Solomon, a partner in the employee benefits practice group at McDermott Will & Emery LLP.
Those who stand to gain the most live in states including New York, Iowa and Washington that recognize same-sex marriages, Solomon said. The government probably will look to state law to define marriage for the purpose of federal benefits, he said.
More than 1,000 federal benefits involve marital status, Joslin said. They affect taxation of worker health care benefits, access to Social Security payments, the ability to transfer money without triggering gift taxes and when couples are liable for levies on their estates.
The decision to overturn DOMA will “completely change” the financial planning for same-sex married couples, Lisa Siegel, senior wealth planner at the private bank unit of Wells Fargo & Co., said in an interview before the ruling. “It affects taxes, finances and a host of legal rights.”
One of the most significant benefits for married couples is the ability to pass unlimited amounts of money -- for groceries or when adding each other to the deed of a property -- without it being considered a taxable gift, Siegel said.
There also are advantages in estate planning. A same-sex spouse would be able to use the unlimited estate-and-gift marital deduction of $10.5 million in 2013 for married couples, or $5.25 million per individual, Siegel said. The effect of the marital deduction for heterosexual married couples is to defer federal estate taxes owed until the death of the surviving spouse.
“The implications are enormous where at least one member of the couple is a federal employee,” or in the military, Joslin said of overturning DOMA. There are many advantages extended to opposite-sex spouses including health care, disability and death benefits that same-sex married couples were denied on a federal level, she said.
The tax consequences for employee health care benefits will be “huge” as well, Joslin said.
Under DOMA, if people put their same-sex spouses on their insurance plan the value of any employer contribution to premiums usually was deemed taxable income for the worker, which isn’t the case for opposite-sex spouses.
“It can be thousands of dollars for a family,” she said.
There’s also good news for employers who have been “grossing-up” worker salaries to make up for the added cost of having a same-sex partner on their health care plan, Solomon said. “You’ll have fewer people to gross up,” he said.
The ability to file a federal joint tax return may save some married gay couples money, Kathy Pickering, executive director at the Tax Institute at tax preparer H&R Block Inc., said in a statement. A couple filing a joint return where one spouse has taxable income of $70,000 and the other $30,000 would see a $1,625 tax savings compared with filing two individual returns, Pickering said.
“The Supreme Court decision today will have enormous ramifications for how same-sex married couples file taxes for 2013 and each year going forward,” she said.
There also may be financial disadvantages from filing jointly, Solomon said. If both spouses earn salaries of $400,000 a year or more, the ruling may mean thousands of dollars in higher income taxes because of the so-called marriage penalty.
Currently, two partners each earning $400,000 a year in taxable income pay a lower federal income-tax rate than if they were married. That’s because the top rate of 39.6 percent starts at taxable income above $400,000 for singles and $450,000 for married couples.
If same-sex spouses file jointly under federal law, their combined income is $800,000, of which $350,000 would be subject to the highest federal tax rate.
Questions about federal recognition may remain for couples who marry in a state that allows same-sex marriage and move to another that doesn’t, Joslin said.
It’s also unclear whether gay couples in states that permit civil unions or domestic partnerships will be entitled to federal marital benefits or whether people will be able to file retroactive claims for tax refunds.
“Somebody’s going to get denied a benefit and sue,” Solomon said. “That’s going to be our next case on this issue.”
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