Perspective on Federal Tax Implications for Same-Sex Married Couples

(GayWebSource.com – Gay News & Press Network) – Posted by Michael Lamb – Echelon Magazine

By Gene Sulzberger, Senior Vice President of EFG Capital Advisors

The recent U.S. Supreme Court ruling in United States vs. Windsor overturning Section 3 of the
Defense of Marriage Act (DOMA) has brought to the surface numerous federal tax implications
for same-sex married couples. The question arose whether there are different federal tax
treatments for those U.S. same-sex couples legally married in domestic or foreign jurisdictions and
residing in those jurisdictions adopting same-sex marriage, versus those couples legally married
in domestic and foreign jurisdictions, but now residing in jurisdictions that do not recognize
same-sex marriage.

HOW DID THE IRS ADDRESS THE WINDSOR DECISION?
The IRS issued guidance on the Windsor decision by adopting a “state of celebration” rule. This
rule states that same-sex couples legally married in jurisdictions recognizing their marriages will be
treated as married for federal tax purposes, regardless of whether the state they reside in recognizes
their marriage. This change was effective Sept. 13, 2013. The IRS asserted the need for uniform rules
nationwide so that there will be “efficient and fair tax administration” on federal tax matters. The
IRS also said that a rule in which a couple’s marital status could change depending on their state of
residence would be too difficult to maintain. Married same-sex couples also have the option to file
amended U.S. income and estate tax returns for prior years pursuant to the statute of limitations. The
marital deduction for estate taxes is probably the most significant tax benefit to now apply to same-sex
married couples … this was the fact pattern behind the Windsor decision.

WHAT OTHER ISSUES HAVE ARISEN FROM THE WINDSOR DECISION?
The issue of health insurance benefits for same-sex couples was also revisited. For example,
employees who previously purchased health insurance for a same-sex spouse on an after-tax basis,
now have the ability to treat that premium as a pretax amount, excludable from income. There is
an ability to go back and seek refunds for this extra amount for the periods within the statute of
limitations (in general, three years from the date the return was filed or two years from the date the tax
was paid, for the purposes of determining whether a return may be amended or a refund collected).
Also, The Department of Labor issued a “guidance” in September 2013 stating that the “state of
celebration” rule will also apply under the Employee Retirement Income Security Act (ERISA). The
secretary of labor stated that if there were a rule based on the state of domicile it “would raise significant
challenges for employers that operate or have employees (or former employees) in more than one state
or whose employees move to another state while entitled to benefits.” This “approach is consistent with
the core intent underlying ERISA of promoting uniform requirements for employee benefit plans.”
Thus, for employee benefit plan purposes, a same-sex spouse should have all the rights of an opposite
sex spouse under an employer’s qualified plans. Companies not adhering to this standard are violating
ERISA guidelines.

ARE THERE OPEN QUESTIONS REGARDING TAXATION FOR SAME-SEX MARRIED COUPLES?
There is an open issue regarding the filing of state income taxes. It is expected that most states that
do not recognize same-sex marriage will deny same-sex married couples the ability to file joint state
income tax returns. Also, the IRS’ statements are not binding on other federal agencies. For instance,
the Social Security system looks to the state law on determining marital status and Medicaid is a
federal program that is administered by the states.

Other state laws that would not apply are, for example, the homestead protections in Florida. If
one spouse dies as part of a same-sex couple lawfully married in New York and residing in Florida,
the surviving spouse would not be able to take advantage of the homestead protections granted in
Florida. Much of estate planning is still based on state law concepts, including intestacy laws and the
elective share.

Also, the new federal tax treatment will not apply to registered domestic partnerships, civil unions
or other similar relationships that may be recognized under state laws

.
WHAT IS MY ADVICE FOR SAME-SEX COUPLES GOING FORWARD?
This is the time for same-sex couples to be discussing their financial and estate planning with their
estate planning attorneys, investment professionals and accountants. First, if they were married in a
state that honors same-sex marriage, they may want to amend previous tax returns. They should also
discuss benefit coverage pursuant to the ERISA guidelines with their employers. Couples who are not
legally married may want to determine if marriage is an option they wish to explore.
An important word of caution in this whole scenario is the legal concept of divorce. Divorce is a
state law concept and to get divorced in a state that does not honor same-sex marriage is proving to be
difficult. Divorce is an area of law that has to catch up.