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CCH Tax Briefing
SUPREME COURT STRIKES DOWN DOMA
June 27, 2013
Highlights
Supreme Court Rules
Against DOMA 5 To 4
Joint Returns For Same-Sex
Married Couples
Tax Refunds Possible
“Marriage Penalty” Shared
By Same-Sex Couples
Estate Planning Strategies
Change
Employers Expected To
Revise Benefit Plans
No Nationwide Same-Sex
Marriage Mandate
Inside
Issues At Stake.......................................................2
Supreme Court’s Holdings..................................2
Federal Tax Consequences..................................2
Income Tax Benefits And Disadvantages..........3
Filing Status...........................................................3
Filing Status, AGI Floors And
Threshold Amounts..............................................4
Other Same-Sex Couple Income Tax Issues.......5
Estate And Gift Taxation......................................6
Employee Benefits................................................ 7
Affordable Care Act................................................8
Social Security Benefits.........................................9
Effective-Date Issues.............................................9
Special Report
Post-DOMA Tax Implications Loom Large
In a 5 to 4 decision, the United States
Supreme Court has found that Section
3 of the federal Defense of Marriage
Act (DOMA) violates the equal protection
clause of the Fifth Amendment of the U.S.
Constitution as applied to persons of the
same sex who are legally married under the
laws of their state (Windsor, S.Ct., June 26,
2013, 2013-2 ustc ¶50,400). The majority,
written by Justice Anthony Kennedy,
held that DOMA is unconstitutional as
a deprivation of the liberty of the person
protected by the Fifth Amendment of the
Constitution.
The decision opens the door for same-sex
married couples to enjoy many federal taxrelated
benefits previously available only to
opposite-sex married couples. These include
income tax benefits, estate and gift tax benefits,
taxpayer-friendly employee benefits,
and more. Same-sex couples must now also
deal with circumstances under the tax law
that may create a so-called “marriage penalty.”
Employers must prepare for extensive
changes in the treatment of same-sex
couples. And individuals claiming tax credits
and other provisions under the Patient
Protection and Affordable Care Act are impacted
by the decision.
IMPACT. It is unclear how quickly the
IRS and other federal agencies will react
to the Supreme Court’s decision …or
how quickly same-sex couples may need
to act to protect certain rights. President
Obama has directed all federal
agencies, including Treasury and the
IRS, to revise their regulations to reflect
the Supreme Court’s decision as soon as
possible. Many tax professionals had
been advising same-sex couples to file
protective refund claims in anticipation
of a favorable ruling from the Supreme
Court. This is one of several strategies
that practitioners and taxpayers should
follow up on, as well as filing amended
returns before the applicable limitations
periods expire on back tax years. The
decision to strike down DOMA goes beyond
refunds. Same-sex couples need to
consider many other tax implications.
IMPACT. The Supreme Court did not extend
same-sex marriage nationwide; it declined
to say whether same-sex couples had
a Constitutional right to marriage that
would override state law. But the Supreme
Court’s decision has opened up federal
benefits –including those under the Internal
Revenue Code-- to same-sex couples
considered married under state law. The
Windsor decision leaves many additional
issues unresolved or unclear. Among them
are the status of “domestic partnerships”
and “civil unions” under state law in connection
with federal benefits, the status of
a same-sex couple married in one state but
now residing in a state in which same-sex
marriage is not recognized, and the ability
of married same-sex couples to divorce
without first moving back to a state that
recognizes same-sex marriage.
CAUTION. Immediately after the Windsor
decision was released, questions arose
regarding the impact of residency upon the
recognition of marital status for federal tax
purposes. Will same-sex couples duly married
in one state who now reside in a state
that does not recognize same-sex marriage
be entitled to federal benefits, including
being able to file jointly under the federal
tax laws? …Or will they be required to file
as single under federal law as well as state
law? While President Obama on June
27 expressed the view that same-sex marriages
performed in one state should apply
2
2013 Expert Analysis
to another, he added that “I’m speaking as a
president and not as a lawyer.”
ISSUES AT STAKE
In December 2012, the Supreme Court announced
that it would take up two cases related
to same-sex couples: Windsor, which
arose out of an estate tax dispute between a
surviving partner/spouse and the IRS; and
Hollingsworth v. Perry (CA-9, Feb. 7, 2012),
which addressed whether the equal protection
clause of the Fourteenth Amendment to
the Constitution prohibits California from
defining marriage as the union of a man and
woman. The Supreme Court heard oral arguments
in both cases in March 2013.
IRS Denies Estate Tax Marital Deduction.
In Windsor, a long-time same-sex couple
married in Canada in 2007. They had previously
registered as domestic partners in New
York City, where they made their home. One
spouse died in 2009. Because of DOMA, the
survivor did not qualify for the unlimited
marital deduction under the Internal Revenue
Code and as a result, the executor of the estate
paid $363,000 in federal estate tax that was
not otherwise due. The survivor as executor
and sole beneficiary filed a refund claim under
Code Sec. 2056(a) (under which property of
a surviving spouse generally passes free of federal
estate tax). The IRS determined that the
survivor was not a spouse under Section 3 of
DOMA and, therefore, not a surviving spouse
under Code Sec. 2056(a). A federal district
court found that Section 3 of DOMA violated
the equal protection clause of the Fourteenth
Amendment because there was no rational
basis to support it. The Second Circuit Court
of Appeals affirmed the lower’s court decision,
finding that homosexuals are a protected class
and that Section 3 of DOMA was not substantially
related to an important government
interest and violated Equal Protection.
SUPREME COURT’S
HOLDINGS
Writing for the majority in Windsor, Justice
Kennedy found that DOMA had departed
from the long standing tradition and history
of reliance on state law to define marriage.
The State of New York had recognized
the validity of same-sex marriages, which
resulted in a status that “is a far-reaching
legal acknowledgment of the intimate relationship
between two people, a relationship
deemed by the State worthy of dignity in the
community equal with all other marriages,”
Kennedy wrote. He reasoned that DOMA
sought to injure this class of persons whom
New York sought to protect, and by doing so
violated basic due process and equal protection
principles applicable to the federal government
and was therefore unconstitutional.
“The decision opens the
door for same-sex couples
to enjoy many tax-related
benefits previously
available only to oppositesex
couples.”
DOMA’s operation in practice, Kennedy
continued, was to treat same-sex marriages as
second-class marriages for purposes of federal
law “by imposing a system-wide enactment
with no identified connection to any particular
area of federal law.” DOMA’s principal
purpose was to impose inequality, not for
other reasons such as governmental efficiency,
Kennedy held. Therefore, the majority
found DOMA invalid for lack of a legitimate
government purpose that could overcome
the burden on those within the class whose
personhood and dignity New York had
sought to protect through its marriage laws.
COMMENT: The majority opinion
listed numerous ways in which DOMA
infringed upon the dignity of same-sex
couples. Among these is financial harm
caused by DOMA to children of same-sex
couples by raising the cost of health care
for families by taxing health benefits provided
by employers to their workers’ samesex
spouses. Another example, Kennedy
wrote, is that DOMA denies or reduces
benefits allowed to families upon the loss
of a spouse and parent, benefits that are
an integral part of family security.
COMMENT: Justice Kennedy qualified
the majority’s ruling at the end of the decision,
stating that its applicability was
“confined to those lawful marriages,”
meaning those recognized by the states
that currently allow same-sex marriages.
Kennedy observed that Section 2 of
DOMA, which allows States to refuse to
recognize same-sex marriages performed
under the laws of other States, had not
been challenged in Windsor and continues
to be the law. On June 26, House
Democrats introduced legislation to repeal
Section 2 of DOMA.
California’s Proposition 8. On the same day
the Supreme Court announced its decision in
Windsor, the Justices ruled, 5-4 (but with a different
mix of Justices for and against), to send
Hollingsworth back to the California courts
rather than to directly decide on the constitutionality
of California’s ban on same-sex marriage.
There, the Supreme Court held that the
petitioners did not have the standing to challenge
the lower court’s decision throwing out
Proposition 8, which denied same-sex couples
the right to marry in California. This decision
paves the way for same-sex marriage to begin
again in California sometime in late July.
FEDERAL TAX
CONSEQUENCES
Under federal income tax rules, same-sex
married couples can now presumably enjoy
benefits that had been unavailable to them
because of DOMA. On the other hand, certain
strategic advantages previously enjoyed
by same-sex married couples who filed as
single individuals under the federal tax laws,
have now likewise ended.
COMMENT. Aside from the fact that it
was a federal tax refund claim in Windsor
that triggered the litigation that found
itself before the U.S. Supreme Court, the
opinion focused on Constitutional rights
and privileges, without any technical
CCH Tax Briefing
©2013 CCH Incorporated. All Rights Reserved.
June 27, 2013
3
discussion of the tax law itself. The Court
judged DOMA for its impact on “over
1,000 federal statutes and the whole
realm of federal regulations.” Very little
was said specifically about federal tax law
beyond that. Nevertheless, the federal tax
law is clearly among those “federal statutes
and regulations” impacted most directly
by the Supreme Court’s holding.
IMPACT. Same-sex couples who were married
under state law for years prior to 2013
now need to decide whether to amend those
prior-year returns still open under the Code’s
statute of limitations, to reflect a change
from unmarried to married filing status.
Same-sex married couples also should consider
updating their estate plans, based upon
the estate and gift tax impact of Windsor.
INCOME TAX BENEFITS
AND DISADVANTAGES
Because of the Supreme Court’s decision, the
same tax benefits and disadvantages faced by
just-married, opposite-sex couples—in changing
from filing as separate, unmarried individuals
to filing as married filing jointly (or
married filing separately)—are now shared by
same-sex married couples. Likewise, however,
those same-sex couples not married under
state law continue to be subject to the same
disadvantages and benefits, and face many of
the same strategic decisions, as unmarried heterosexual
couples under the federal tax law.
CAUTION. As mentioned, above, resolution
is pending on the issue of whether
recognition or non-recognition of a samesex
marriage in the State in which the
same-sex couple currently reside controls
whether the IRS will treat the couple as
married for federal tax purposes. Most
federal agencies have defined marriage in
the past based on a couple’s residency and
not where they were married.
FILING STATUS
A taxpayer’s filing status depends in large
part—if not exclusively in most cases—on
the taxpayer’s marital status. Taxpayers may
be single, surviving spouse, head of household,
married filing joint returns, or married
filing separately. Filing status, in turn, determines
the right to many tax benefits, both in
terms of access and amount. Income tax rate
bracket levels, the standard deduction, personal
exemptions, and the adjusted gross income
(AGI) amounts at which many tax benefits
“phaseout” all hinge upon filing status.
Joint Return Status. Because of the Supreme
Court’s Windsor decision, same-sex couples who
currently are married under state law are presumably
now also barred for federal tax purposes from
filing separate returns as unmarried (or as head of
household, in most cases); they must file either
jointly or married filing separately for 2013 (unless
they are divorced or have a final separation
agreement in place by the end of 2013). The
general rule that has always applied to filing status
now presumably applies to same-sex married
status as well: an individual’s filing status is determined
for the entire year based upon marital
status on December 31 st of that year. The IRS is
expected to issue guidance in this area.
IMPACT. Leading up to the Supreme
Court’s decision, many same-sex couples
filed protective income tax refund claims
using married filing jointly status. A protective
refund claim is a claim filed to
protect the taxpayer’s right to a potential
refund based on a contingent event for
a taxable period for which the period of
limitations is about to expire. Now that
the Supreme Court’s decision is out, full
refund claims, rather than protective
claims, should be filed going forward.
COMMENT. Under current rules, a taxpayer
can sign a joint return if his or her
spouse is serving in a combat zone. In other
limited cases where one spouse cannot sign
the joint return, such as because of injury or
illness, the other spouse may sign the return
and attach a statement explaining why the
spouse was unable to sign. Same-sex couples
who are married under state law are now
presumably allowed these signing benefits.
COMMENT. Because same-sex marriage
is relatively new, the tax implications
of divorce of a same-sex couple are only
starting to manifest themselves.
The Marriage Penalty. Same-sex married
couples who have been denied joint return
status under the federal tax laws prior
to the Supreme Court’s Windsor decision
now need to investigate the effect of joint
return status, both for returns that will be
filed in the future and for prior year returns
still open within the statute of limitations
refund-claim period (generally, but not always,
three years from filing – see this Briefing,
below, for a discussion of this deadline).
The benefits of filing a joint return may
not always be greater than filing separately
as unmarried individuals. Both differences
in tax rate bracket amounts and a variety of
income floors and thresholds used to determine
the right to certain tax breaks come
into play in determining whether some
same-sex couples were better off, income
tax-wise, before the Supreme Court’s decision;
and what they should do now.
IMPACT. Individuals in a relationship
who are not married and who each realize
approximately the same level of
NO NATIONWIDE
EXTENSION OF SAME-
SEX MARRIAGE
The Supreme Court struck down Section
3 of DOMA, which defined marriage as
a legal union between one man and one
woman as husband and wife and defined
spouse as only a person of the opposite
sex who is a husband or wife. The
Supreme Court did not strike down Section
2 of DOMA, which provides that
no state, territory or possession of the
United States shall be required to give
effect to any marriage between persons
of the same sex under the laws of any
other such jurisdiction or to any right
or claim arising from such relationship.
Section 2 was not challenged and, therefore,
was not at issue in Windsor.
CCH Tax Briefing
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2013 Expert Analysis
income and have similar tax deductions
(at least in amount) have generally been
better off from a tax standpoint filing as
unmarried individuals. However, that
assessment tilts in favor of marriage and
filing a joint return if one partner earns
or deducts the greater portion of any otherwise
combined amounts.
COMMENT. Although much press was
given to “marriage penalty relief” when
the Bush-era tax cuts were permanently
extended by the American Taxpayer Relief
Act of 2012 (ATRA), such relief in fact
only related to equality within the standard
deduction amount and the top portion
of the 15 percent income tax bracket.
Other “marriage penalties” continue to
exist within the tax law depending upon
circumstances. For example, the 33 percent
tax bracket for joint filers in 2013
starts at $223,050 taxable income, while
the 33 percent bracket for single taxpayers
starts at $183,250. If there were no marriage
penalty imposed on higher-income
individuals earning similar amounts, the
33 percent bracket for joint filers would
not start until reaching the $366,500
level, or double that set under the Internal
Revenue Code for single filers.
Married Filing Separately. If same-sex
married couples post-Windsor want to keep
their finances (and liabilities) separate for the
purpose of filing separate returns, they will
generally—but not always—pay more federal
income tax. The rate brackets for “married
filing separately” are higher than “unmarried,
not surviving spouse or head of household.”
Innocent Spouse Status. Married taxpayers
who file joint returns are jointly and severally
responsible for the tax and any interest or penalty
due on the joint return. In some cases, a
spouse will be relieved of this shared liability for
tax owed on a joint tax return. Three types of
relief are available: general innocent spouse relief;
separate liability relief; and equitable relief.
IMPACT. Because of the Supreme
Court’s decision, the three types of innocent
spouse relief are now presumably
available to same-sex married couples.
Same-sex married partners cannot turn
a blind eye to any item that is listed on
a joint return. A decision to file joint
returns retroactively for prior tax years
as the result of the Supreme Court’s decision,
therefore, should include consideration
of the joint and several liability
that would be triggered. Separate return
status would eliminate the issue of joint
liability entirely. The IRS is expected to
issue guidance in this area.
Surviving Spouse Claims. A surviving
spouse computes tax using the same rate
brackets as married couples filing joint returns.
Rules for surviving spouse status for
same-sex married couples now presumably
follow the same rules as for opposite-sex
couples. If a taxpayer is a surviving spouse,
the year the spouse died is the last year for
which the taxpayer can file a joint return
with that spouse. A taxpayer can also qualify
as surviving spouse for two tax years following
the year in which his or her spouse
dies if the taxpayer maintains a household
for certain dependents (a child, adopted
child, foster child, or stepchild), has not
remarried, and filed or could have filed a
joint return with the spouse for the year in
which his or her spouse died.
FILING STATUS, AGI FLOORS
AND THRESHOLD AMOUNTS
The amounts of income and deductions
reported on a return are used by the IRS
in determining whether certain threshold
levels and floors are reached. Those
amounts in turn determine access to a variety
of tax benefits. Some of these floors
or threshold amounts are applied to all
filing statuses uniformly; others vary depending
upon filing status.
IMPACT. Depending upon adjusted gross
income (AGI) and other levels reported
on a return, combining the income and
deductions of each same-sex partner under
a single joint return may or may not
work to the advantage of the couple as a
unit, in contrast to filing as unmarried or
married filing separately.
Floors. Tax benefits dependent upon floor
levels of adjusted gross income (AGI) or
modified AGI (MAGI) set forth under the
Internal Revenue Code include the following
itemized deduction categories, among others:
Medical expense deduction floor (10
percent AGI (temporarily at 7.5 percent
for taxpayers over age 65));
Casualty loss deduction floor (10 percent
AGI); and
Miscellaneous items deduction floor (2
percent AGI).
COMMENT. In the case of married individuals
who file separate returns, if one
spouse itemizes deductions on his or her
return, the other spouse must also do so irrespective
of whether his or her standard
deduction would be larger. This rule does
not apply to unmarried couples who file
separate returns.
Ceilings. Use of excess capital losses to offset
ordinary income is generally limited to
$3,000 per return, whether on a joint return
or an unmarried single return. Taxpayers
who are married filing separately, however,
are allowed only a $1,500 maximum capital
loss deduction; the balance in all cases may
be carried forward into the next tax year.
Thresholds. For some taxpayers, AGI above
designated thresholds reduces certain tax
benefits. A reduction in itemized deductions
and a reduction in personal exemptions
are the most common among higherincome
individuals. For example:
Itemized deductions otherwise allowed must
be reduced by the lesser of (1) three percent of
AGI that exceeded a threshold amount (see
chart, below) adjusted annually for inflation,
or (2) 80 percent of the total amount of otherwise
allowable itemized deductions. No reduction
is required in the case of deductions
for medical expenses, investment interest,
and casualty, theft or wagering losses.
Personal exemptions, likewise, are required
to be reduced where AGI exceeds a specified
threshold amount: by two percent for each
$2,500 (or fraction thereof) by which AGI
CCH Tax Briefing
©2013 CCH Incorporated. All Rights Reserved.
June 27, 2013
5
exceeds the applicable threshold amount
(see chart, below) for the year ($1,250 for
married persons filing separately).
Net Capital Gains/ Net Investment Income.
AGI thresholds are also used in taxing
investment-type income:
Net Capital Gains are taxed at the 20
percent maximum rate at levels beyond
which income would otherwise be
pushed into the 39.6 percent bracket
(for 2013, that applicable threshold
amount is $450,000 AGI for married
individuals filing joint returns and surviving
spouses, $425,000 for heads of
households, $400,000 for single individuals,
and $225,000 for married individuals
filing separate returns. (The
“regular” 15 percent capital gains rate
is likewise reduced to zero percent for
taxpayers in the 10 percent bracket—
a benefit that can be used by same-sex
couples where one partner has very
little income).
Net Investment Income, as defined under
new Code Section 1411, is taxed
starting in 2013 at 3.8 percent, keyed
to a modified AGI threshold based on
filing status ($250,000 for joint filers;
$125,000 for married, filing separately;
and $200,000 for all others).
Deduction/Credit Thresholds. Thresholds
are also commonly used to restrict deductions,
credits and other benefits based upon adjusted
gross income and filing status:
2013 AGI (MAGI) PHASEOUT THRESHOLD START POINTS
Joint Return Single Married Filing Separately
Itemized Deductions: $300,000 $250,000 $150,000
Personal Exemptions: $300,000 $250,000 $150,000
Maximum Net Capital Gains: $450,000 $400,000 $225,000
Net Investment Income Surtax: $250,000 $200,000 $125,000
Additional Medicare Tax: $250,000 $200,000 $125,000
Child Tax Credit: $110,000 $75,000 $55,000
American Opportunity Credit: $160,000 $80,000 $0
Lifetime Learning Credit: $107,000 $53,000 $0
IRA Deduction (plan participants): $95,000 $59,000 *
Roth IRA Eligibility: $178,000 $112,000 **
*Deduction determined under single status if not living with spouse at anytime during tax year; otherwise partial deduction if MAGI is less than
$10,000 and no deduction if MAGI is $10,000 or more
**$10,000 if lived with spouse at anytime during tax year; $112,000 if did not live with spouse at anytime during tax year
IMPACT. In dealing with threshold
amounts, a benefits/drawbacks analysis generally
depends upon the extent to which that
portion of any tax benefit below a threshold
amount would otherwise go unused by
one of the partners if filing separately. With
certain deductions, credits or contribution
levels, however, electing “married filing separately”
status may relegate each spouse to
$0 benefit depending upon circumstances.
OTHER SAME-SEX COUPLE
INCOME TAX ISSUES
Being married for federal tax purposes—exclusive
of the right to any particular filing
status—can also give rise to additional tax
benefits and restrictions. The following situations
may be particularly relevant in the
case of married same-sex couples after the
Supreme Court’s Windsor decision:
Dependency Exemptions. In 2012, the
IRS explained on its website that if a child
is a qualifying child under Code Sec. 152(c)
and both parents are same-sex partners,
either parent, but not both, may claim a
dependency deduction for the qualifying
child if separate returns are filed. If both
parents can otherwise claim a dependency
deduction for the child on their income tax
returns, the IRS will treat the child as the
qualifying child of the parent with whom
“Same-sex couples may
find that the benefits of
filing a joint return may
not always be greater than
filing separately...”
the child resides for the longer period of
time. If the child resides with each parent
for the same amount of time during the tax
year, the IRS will treat the child as the qualifying
child of the parent with the higher adjusted
gross income.
CCH Tax Briefing
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2013 Expert Analysis
COMMENT. The Supreme Court decision
will presumably trigger tie-breaker
rules and divorce settlement agreements
previously available only to opposite-sex
married couples.
Education Benefits. Access to a number of
education tax credits by same-sex couples
has been limited, both because of a student’s
status as a member or non-member of the
taxpayer’s family and because lower phaseout
levels that apply to unmarried filers.
AOTC and Lifetime Learning Credit:
A taxpayer can claim the American Opportunity
Tax Credit (AOTC) or the
Lifetime Learning Credit for qualified
expenses paid by the taxpayer for the
education of the taxpayer, the taxpayer’s
spouse, or the taxpayer’s claimed dependent
for the tax year for which the credit
is claimed. Because of DOMA, a taxpayer
could not claim the AOTC or Lifetime
Learning Credit for qualified expenses
paid by his or her same-sex spouse.
Coverdell Education Savings Accounts.
A Coverdell Education Savings
Account (ESA) is a savings vehicle
similar to an individual retirement
account (IRA). If a Coverdell ESA
is transferred to a surviving spouse as
the result of the beneficiary’s death,
the Coverdell ESA retains its status
and the spouse may treat the account
as his or her own and need not withdraw
the assets as a result of the transfer.
Because of DOMA, this treatment
had been unavailable to the surviving
spouse of a same-sex married couple.
IRA Withdrawals For Education.
Taxpayers who own IRAs (traditional,
Roth, SEP IRAs and SIMPLE
IRAs) can make penalty-free withdrawals
to pay higher education expenses
to the extent the distribution
does not exceed the qualified higher
education expenses of the taxpayer,
the taxpayer’s spouse, or the child or
grandchild of the taxpayer or the taxpayer’s
spouse. Once again, because
of DOMA, this treatment had been
unavailable to the surviving spouse of
a same-sex married couple.
Post-Death IRA Payments. When a surviving
spouse is the beneficiary of an individual
retirement account (IRA) he or she has certain
options not granted to other beneficiaries,
including the ability to rollover the decedent’s
IRA, tax free, to another retirement
plan. And, if the surviving spouse is the sole
beneficiary, he or she can elect to treat the
IRA as if it were his or her own. These options
may allow the survivor to delay the
start of required minimum distributions
(RMDs) from the account and to stretch
out the payment of RMDs over a longer period
of time. DOMA had foreclosed these
more favorable spousal benefits for same-sex
married spouses. The Supreme Court’s decision
in Windsor presumably opens up these
distribution benefits to same-sex spouses.
“In the case of family
attribution rules, it is
unclear whether application
of marital status for samesex
spouses relates back
to transactions already
completed.”
Family Stock Attribution Rules. Code Sec.
267 contains attribution rules designed to
prevent related taxpayers (including “spouses”
under Sec. 267(c)(4)) from recognizing
losses and other tax benefits otherwise allowed
in a variety of transactions. For example,
an individual is treated under Code
Sec. 318(a)(1) as constructively owning stock
owned directly or indirectly by his or her
spouse (unless legally separated), children,
grandchildren, or parents. Stock attribution
rules under Code Sec. 318 apply when determining
whether a redemption of stock is
treated as a sale or exchange or as a dividend.
Likewise, prohibited transactions involving
pension plans under Code Sec. 4975 are
defined, in part, upon dealing with certain
persons, including spouses of those persons.
IMPACT. The Supreme Court’s grant of
federal marital status to same-sex married
persons is apparently not only prospective
starting June 26, 2013, the date of the
Windsor decision, but also presumably
applies retroactively to all open years.
Nevertheless, in the case of attribution
rules, application of marital status for
same-sex spouses may not necessarily relate
back to transactions already completed.
The need under the tax laws to
have finality for transactions as they occur
appears to be the overriding argument
in favor of not giving retroactive effect to
family attribution. Eventual IRS guidance
on this issue is anticipated.
Resident And Non-Resident Aliens. Presumably,
the Supreme Court’s decision applies
to same-sex resident or nonresident
aliens to the extent they are considered married
under the law of a foreign jurisdiction.
Further clarification of the application of
the Supreme Court’s Windsor decision to
these taxpayers may be needed.
ESTATE AND GIFT TAXATION
The Windsor case, as discussed above in this
Briefing, involved the estate tax marital deduction.
The marital deduction is a key planning
tool to defer transfer taxes until the
surviving spouse dies. Because of DOMA,
same-sex married couples could not take
advantage of the estate tax marital deduction
and other provisions, such as portability.
DOMA also precluded same-sex married
couples from the benefits of special rules for
gifts between spouses and from spouses.
Marital Deduction. Code Sec. 2056 provides
an unlimited deduction from the gross estate
for property passing from a decedent to a surviving
spouse. Generally, the decedent must
be survived by his or her spouse who is a U.S.
citizen at the time of the decedent’s death, the
property interest must have passed from the
decedent to the spouse, and the property interest
must be a deductible interest. Additionally,
the property’s value must be ascertainable.
IMPACT. The relatively high $5.25 million
estate tax exclusion for 2013 for
all estates makes addition of a marital
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©2013 CCH Incorporated. All Rights Reserved.
June 27, 2013
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deduction unnecessary in the majority of
cases. However, as Windsor showed, it is
a valuable tax benefit for larger estates.
Many same-sex married couples may find
it valuable to revisit their estate plans to
make certain that interests passing to the
other spouse qualify for the marital deduction
and other tax benefits.
Portability. The American Taxpayer Relief
Act of 2012 extended permanently the concept
of portability, which generally allows
the estate of a surviving spouse to utilize the
unused portion of the estate tax applicable
exclusion amount of his or her last predeceased
spouse. Because of DOMA, only
opposite-sex married couples could take advantage
of portability.
IMPACT. The Supreme Court’s decision
presumably enables same-sex married
couples to take advantage of portability as
part of their estate planning. The IRS is
expected to issue guidance.
Gifts. Because of DOMA, only oppositesex
married couples were allowed to “split”
gifts to take advantage of a doubled annual
gift tax exclusion ($14,000 for 2013, for
a total tax-free gift of $28,000). DOMA
presented even more of a disadvantage
for same-sex married couples in that only
transfers between spouses, where both individuals
are U.S. citizens, are allowed an
unlimited gift tax exclusion under Code
Sec. 2523.
IMPACT. Same-sex married couples can
now presumably transfer assets between
themselves with no concern of lifetime gift
tax consequences. This creates considerably
greater flexibility for estate planning.
The IRS is expected to issue guidance.
COMMENT. Gifts to cover medical and
education expenses for an individual, if
paid directly to the medical or education
provider, are gift tax free without limit
and are not counted against the annual
$14,000 exclusion for any individual.
COMMENT. Where one spouse is not a
U.S. citizen, the annual exclusion from
gift taxes for gifts made to the noncitizen
spouse is $143,000 for 2013.
EMPLOYEE BENEFITS
Perhaps in no area outside of income taxes is
the impact of the Supreme Court’s decision
more expansive than on employee benefits.
Because of DOMA, employers that allow an
employee to add his or her same-sex spouse
to their health plan had to impute income
to the employee for federal income tax purposes
equal to the fair market value of health
coverage provided to the same-sex spouse.
If the same-sex spouse qualified as a dependent,
this rule did not apply. DOMA also
precluded same-sex married couples from
sharing the same benefits of health flexible
spending accounts, health savings accounts
and health reimbursement arrangements
available to opposite-sex married couples.
IMPACT. Employers in states that allow
same-sex marriage will presumably need
to amend plans to cover same-sex married
spouses. The IRS is expected to provide guidance
on the timing of plan amendments, including
the issue of whether benefits need to
be made retroactive or only prospective from
the date of the Windsor decision.
Domestic Partners. Many employee benefit
plans in the private and public sectors
refer to domestic partners rather than samesex
spouses. The definition of domestic
partner varies. In some cases, it may encompass
opposite-sex domestic partners as
well as same-sex domestic partners.
COMMENT. The federal government’s
Office of Personnel Management defines
domestic partner for purposes of federal
employee benefits as a committed relationship
between two adults, of the same sex.
Tax Treatment. Domestic partners who are
not married under state law are not treated
as spouses for federal income tax purposes.
As a result, an employee must continue
to pay taxes on the fair market value of
the coverage for the employee’s domestic
partner (whether the domestic partner is a
same-sex partner or an opposite-sex partner).
However, domestic partner benefits
are tax-free if the employee’s partner qualifies
as a dependent under Code Sec. 152;
that is, if benefits are paid for a person who
meets the following requirements:
Receives more than half of his or her
support from the taxpayer for the year.
Uses the taxpayer’s home as the principal
abode and is a member of the taxpayer’s
household during the entire tax year.
Is in a relationship with the taxpayer
that is not a violation of local law.
IMPACT. The Supreme Court’s decision
may open the window to refunds of taxes
paid by employees on income imputed to
employees for same-sex married spouse
and refunds of payroll taxes paid by employers
on that income. FICA tax refund
claims by employers and employees for
prior, open years may also be possible.
COMMENT. Some employers have attempted
to equalize the treatment between
opposite-sex couples and same-sex
couples by providing so-called gross-ups
to cover the additional taxes that samesex
couples pay on health benefits. Many
employers require an employee to certify
that a domestic partner qualifies as a dependent
under Code Sec. 152.
Cafeteria Plans. Employer contributions to
a cafeteria plan are usually made under a salary
reduction agreement between the employer
and the employee in which the employee agrees
to contribute a portion of his or her salary on
a pre-tax basis to pay for the qualified benefits.
Salary reduction contributions are not actually
or constructively received by the participant.
Therefore, those contributions are not considered
wages for federal income tax purposes. In
addition, those sums generally are not subject to
FICA and FUTA taxes. However, pre-tax dollars
could not be used to pay for coverage of a
same-sex spouse because of DOMA. This now
should change as a result of the Court’s decision.
Health Flexible Spending Accounts. A
health flexible spending arrangement (FSA)
CCH Tax Briefing
8
2013 Expert Analysis
is a form of cafeteria plan benefit, funded
by a voluntary salary reduction arrangement
with pretax dollars. The benefits are
subject to an annual maximum and an annual
“use-or-lose” rule. Qualified medical
expenses are those incurred by, among other
individuals, the employee and his or her
opposite-sex spouse. Because of DOMA,
only opposite-sex married couples could use
health FSA dollars for a spouse’s qualified
medical expenses.
IMPACT. The Supreme Court’s decision
to strike down DOMA presumably opens
the door to same-sex married couples being
able to use FSA dollars for qualified
medical expenses of both spouses. The IRS
is expected to issue guidance.
COMMENT. A cafeteria plan may not
allow an employee to request salary reduction
contributions for a health FSA in
excess of $2,500 for plan years beginning
after December 31, 2012.
Health Savings Accounts. A health savings
account (HSA) is a vehicle that eligible taxpayers
can use to pay for or reimburse qualified
medical expenses. Contributions to
an HSA are tax-deductible (employer contributions
are excluded from gross income)
and distributions are tax-free if used to pay
for qualified medical expenses. To be an eligible
taxpayer, the individual, among other
requirements, must be covered by a high-deductible
health plan (HDHP), not enrolled
in Medicare, not claimed as a dependent on
another taxpayer’s return. Qualified medical
expenses are those incurred by, among
others, the taxpayer and his or her spouse.
Because of DOMA, only opposite-sex married
couples could HSA dollars for a spouse’s
qualified medical expenses.
IMPACT. With DOMA being struck
down by the Supreme Court, same-sex
married couples will presumably be able
to use HSA dollars for qualified medical
expenses of both spouses.
COBRA/FMLA. Federal law requires that
certain employers offer continuation of health
care coverage to employees, their spouses,
and families (“COBRA coverage’). Current
federal laws related to COBRA coverage do
not apply to same-sex married couples. The
DOMA definition of spouse precludes the
extension of Family and Medical Leave Act
(FMLA) leave benefits to opposite-sex partners.
After the Supreme Court’s decision in
Windsor, these rights presumably would now
be available to same-sex spouses.
“The IRS is expected
to provide guidance on
the timing of employee
benefit plan amendments,
including the issue of
whether benefits need to
be made retroactive or
only prospective.”
Retirement Plans. The Internal Revenue
Code provides extensive protections
for the spouse of an employee to share in
the employee’s retirement benefits payable
through Code Sec. 401(k) plans and other
qualified plans. These protections would
presumably now apply to the same-sex
spouse of an employee.
AFFORDABLE CARE ACT
The Patient Protection and Affordable Care
Act, signed into law by President Obama
in 2010, set in motion a host of changes to
the delivery of health care and health insurance
coverage. Some of the changes already
in place affect health savings accounts (discussed
above in this Briefing). Other changes
are scheduled to take effect after 2013.
Individual Mandate And Penalty. Beginning
in 2014, the Affordable Care Act
imposes a penalty on individuals who do
not carry minimum essential health coverage
for one or more months, subject
to certain exceptions. Married taxpayers
who file a joint return are jointly liable
for any penalty that may be imposed
upon either spouse. The penalty does not
apply in certain cases, such as in the case
of individuals whose household incomes
are below their filing thresholds. Now
that DOMA has been struck down, samesex
married couples presumably will be
treated in the same manner as oppositesex
married couples for purposes of the
individual mandate and its penalty.
COMMENT. The Affordable Care Act prohibits
the IRS from using liens or levies to
collect any unpaid penalty. The IRS cannot
levy on the property of one spouse to satisfy
an unpaid penalty of the other spouse.
Premium Assistance Tax Credit. Beginning
in 2014, the Code Sec. 36B premium assistance
tax credit is scheduled to be available
to those qualified individuals and families
who are not offered minimum essential coverage
and as a result obtain coverage through
a health benefit exchange. The Affordable
Care Act provides for advance payment of
the credit. Taxpayers who are married at the
end of the tax year must file a joint return
to claim the credit. Because DOMA has
been struck down, same-sex married couples
will presumably need to file a joint return to
claim the credit.
Code Sec. 45R Credit. For tax years 2010
through 2013, eligible employers may claim
a credit of 35 percent of health insurance
premiums paid (25 percent for small taxexempt
employers). In tax years beginning
after 2013, an employer must participate in
an insurance exchange in order to claim the
credit. The credit is scheduled to increase
to 50 percent for small business employers
(35 percent for small tax-exempt employers)
after 2013 (but will terminate after 2015).
Certain family members are not treated as
employees for purposes of the credit. Under
DOMA, these restrictions did not apply
to same-sex married couples because their
marriages were not recognized for federal
purposes. With DOMA’s demise, a samesex
spouse who satisfies any of these criteria
would presumably not be treated as an employee
for purposes of the credit.
CCH Tax Briefing
©2013 CCH Incorporated. All Rights Reserved.
June 27, 2013
9
SOCIAL SECURITY BENEFITS
Because of DOMA, same-sex married couples
did not have the same benefits under
Social Security that opposite-sex married
couples have enjoyed for many years. Unlike
opposite-sex couples, for example, there are
no survivor benefits for the surviving spouse
of a same-sex married couple. Also, the divorced
spouse of a formerly married samesex
couple cannot not claim benefits based
on the earnings of his or her ex-spouse.
IMPACT. The Social Security Administration
(SSA) has based federal rights to
benefits on whether marital rights exist
in the couple’s current state of residence
rather than the state in which they were
married. The impact of Windsor on the
manner in which federal agencies will
treat Social Security benefits remains to
be sorted out.
Survivor Benefits. When an individual
dies, his or her surviving spouse may be
eligible for Social Security benefits if the
surviving spouse is age 60 or older, age 50
or older and disabled, or any age if he or
she is caring for the decedent’s child who is
younger than age 16 or disabled and entitled
to Social Security benefits on the record
of the deceased individual. With DOMA
having been struck down, survivor benefits
previously available only to opposite-sex
married couples are now presumably available
to same-sex married couples. The SSA
is expected to provide guidance.
Divorced Spouses. If an individual is divorced,
his or her ex-spouse may qualify
for Social Security benefits based on that
individual’s earnings. Generally, a divorced
spouse must have been married to the individual
for at least 10 years and have been
divorced at least two years. Additionally,
the divorced spouse must be at least age
62, unmarried and ineligible for an equal
or greater benefit based on his or her own
earnings or the earnings of someone else.
These benefits are now presumably available
to divorced individuals who were previously
in a same-sex marriage. The SSA is expected
to provide guidance.
Death Benefits. The SSA pays a onetime
death benefit of $255 to the decedent’s
surviving spouse in an opposite-sex
marriage or minor child. The SSA will
presumably now pay the one-time death
benefit to the surviving spouse in a samesex
marriage.
EFFECTIVE-DATE ISSUES
Determination of the effective date for applying
the Supreme Court’s holding to federal
tax law is not straightforward in all cases
and will necessitate further guidance from
the IRS. Same-sex married couples who
were not considered married under federal
law prior to the Supreme Court decision
are presumably not just considered married
starting on the date of the Supreme Court’s
decision, June 26, 2013 but are considered
married retroactively to the date of their
marriage pursuant to state law. This retroactive
effective date raises a number of immediate
federal tax issues:
Should same-sex couples now file
amended returns claiming joint return
status?
Are same-sex couples now required to
amend past-year returns for joint status
even if they did better tax-wise overall
by filing separately as unmarried individuals?
Will the IRS consider the Supreme
Court’s decision in determining marital
status when auditing prior-year returns?
Amended Joint Returns/Claims For Refund.
Amended returns are filed to correct
errors made on previous returns. Although
the Internal Revenue Code does not specifically
permit amended returns, the IRS usually
accepts them. But while the IRS’s discretion
to accept or reject amended returns
has been recognized, courts have required
the IRS to accept amended returns where
its rejection of them has been found to be
arbitrary and unjust.
Limitations Period. The statute of limitations
for amending or auditing a return is
STATES THAT
RECOGNIZE SAME-SEX
MARRIAGE
Connecticut
Delaware(1)
Iowa
Maine
Maryland
Massachusetts
Minnesota(2)
New Hampshire
New York
Rhode Island(2)
Vermont
Washington
District of Columbia
*As of June 27, 2013
(1) Effective July 1, 2013
(2) Effective August 1, 2013
Note: California granted marriage licenses
to same-sex couples from June
16, 2008 to November 5, 2008.
Note: The Little Traverse Bay Bands of
Odawa Indians in Michigan, the Coquille
Native American Nation in Oregon and
the Suquamish Native American Nation in
Washington recognize same-sex marriage.
Note: 37 States have laws expressly
restricting marriage to opposite-sex
couples.
STATES THAT
RECOGNIZE SAME-SEX
UNIONS/DOMESTIC
PARTNERSHIPS
California
Colorado
Hawaii
Illinois
Nevada
New Jersey
Oregon
Wisconsin
generally three years from the filing date or
two years from the date taxes are paid, whichever
is later. This rule may generally apply for
same-sex married couples as follows:
CCH Tax Briefing
10
2013 Expert Analysis
Joint returns may be filed, usually as an
amended return with a refund claim,
until the three-year limitations period
(or the two-year payment period, if
later) expires. For individuals who filed
2009 tax returns on or before April
15, 2010, the limitations period for
that year is closed. For those who filed
their 2009 returns on an automatic sixmonth
extension on October 15, 2010,
however, the limitations period for the
2009 tax year remains open until October
15, 2013. To claim joint return
status on an amended 2009 tax return
under the three-year rule, both married
partners’ original tax returns must have
been filed within that extended period.
Taxpayers who filed protective refund
claims prior to the Supreme Court’s decision
should be on the alert to any forthcoming
IRS guidelines that may facilitate
the agency’s processing of those claims.
Taxpayers who had a lower combined
overall tax liability filing as unmarried single
individuals during an open year appear
to be under no obligation now to file an
amended return to file jointly (or as married
filing separately if at least one partner
does not consent to a joint return).
IRS Audit Policy. Technically, the IRS, on
audit of an open year for which any previously-filed
return by a married, same-sex
partner used unmarried, single-filer status,
may be able to require that tax be recomputed
based on either a joint return, or married
filing separately status return. However,
since audits are under IRS’s discretionary
powers, the consensus among at least some
practitioners, is that IRS National Office
may –and more likely will— direct agents
to by-pass any filing-status issues unless the
taxpayer requests a change.
2013 Tax Year. For 2013 returns that will be
filed in 2014, the Supreme Court’s Windsor
decision presumably relates back to the entire
2013 tax year in determining filing status.
COMMENT. Married partners do not have
the option to file short-year returns as unmarried
for the January 1 – June 26, 2013
period; they must file jointly or married filing
separately for the entire 2013 tax year.
2012 Tax Year. Taxpayers who are on extension
until October 15, 2013 for filing their
2012 tax year returns appear to be required
to file those returns either jointly or married
filing separately. Taxpayers who filed their
2012 tax year returns before June 26, 2013,
as separate, unmarried individuals, however,
may not need to change their filing status to
married filing joint if it would be less favorable
to their overall tax liability. The IRS
may issue guidance on this issue.
CCH Tax Briefing
©2013 CCH Incorporated. All Rights Reserved.