U.S. Supreme Court Ruling in DOMA Case Extends RE Tax & Homeownership Benefits
Same-sex couples in 13 U.S. states and the District of Columbia, including all six New England states, who have been joined together legally through marriage are about to enjoy hundreds of federal benefits and legal protections previously denied to them under the Defense of Marriage Act (DOMA). Passed into law in 1996, DOMA defines marriage, for federal purposes, strictly as a legal union between one man and one woman as husband and wife. But, on June 26, the U.S Supreme Court overturned a key provision of law, ruling 5-4 in in the case of U.S. v. Windsor that Section 3 of DOMA is unconstitutional because it denies the right to liberty and equal protection for gay couples.
The impact of the Supreme Court’s decision in the DOMA case is far-reaching, with over 100,000 legally-married same-sex couples now eligible to take advantage of more than 1,100 federal benefits, including tax breaks, Social Security and pension rights, and family medical leave laws. The ruling also may influence how these couples decide to hold title on a property, and also affect the calculation of estate taxes owed when a spouse dies, as well as how much capital gain is exempt from taxes in the sale of a home that is owned in the name of only one member of the couple.
From an income tax standpoint, gay and lesbian couples who are legally married will be eligible to file joint federal tax returns, presumably beginning with 2013 returns to be filed in 2014. This, in turn, will affect other parts of the taxpayer’s return, including application of tax rates, netting of capital gains and losses, calculation of tax on Social Security benefits, computation of adjusted gross income, and numerous credits and deductions. Also, there will be questions to be answered concerning benefits available to employees through insurance plans, qualified retirement plans, and other fringe benefit programs, all of legally-married same-sex couples will be eligible to access and the Internal Revenue Service and other government agencies will need to assess and help guide employers and employees in understanding.
Under the U.S. tax code’s “unlimited marital deduction, which addresses the transfer of property to the surviving spouse when one spouse dies or when a marriage is dissolved, legally-married same sex couples will realize a significant benefit because those transfers will no longer trigger a gift tax consequence. In addition, as a result of the Supreme Court decision, gay and lesbian couples will now have the ability to hold title through “tenancy by the entirety,” an option previously only available to legally-married homeowners. Like joint tenancy, this form of ownership means each spouse owns 100 percent of the property and an equal right to possess the home, and provides that when one spouse passes away, the surviving spouse automatically become the property’s sole owner. Unlike joint tenancy, however, under tenancy by the entirety the home is more fully protected from creditors.
While the Court’s action to invalidate Section 3 of DOMA provides clear benefits for legally-married same-sex couples who reside in the states they were married in, it creates more ambiguities in other situations. In fact, many federal laws governing spousal benefits do not contain a statutory definition indicating which law governs whether an individual is married. Furthermore, some federal statutes look to whether a couple is married at the time that benefits are sought, which may suggest that the law of the state of current residence will apply, while others look to the state where the couple was married.
Although it is expected that President Obama will look to use executive orders to approve regulations and interpretations that apply the term “spouse” to same-sex couples who were legally married, regardless of whether the couple was from or has moved, changing regulations that formally define “spouse” will certainly take longer to implement. Notably, at present, the IRS and Social Security determine marriage status by where a couple lives, not where they were married, so anyone in the 38 states that don’t yet recognize or allow same-sex marriage will be unmarried for IRS and Social Security purposes until regulations can be changed. As always, you will want to encourage those affected by this case seek legal advice on title and tax matters from an attorney and/or a tax accountant.