There were two Supreme Court rulings that have greatly affected the federal and state taxation of same sex marriages. On August 29, 2013 the Supreme Court struck down certain provisions of the Defense of Marriage Act (DOMA) and ruled in United States v. Windsor that the federal government must recognize same sex couples who are legally married under state laws. On June 26, 2015 the Court ruled in Obergefell v. Hodges that all states must recognize same sex marriage. The federal government recognizes the marriage of a same sex couple if the marriage was legal where performed.
Since these rulings, there have been some interpretations through various IRS Notices and Rulings. These publications have attempted to clarify the interpretation of the Supreme Court's rulings as far as the implementation of the same sex marriage laws.
The same tax credits are used by all those who file jointly.
Beginning in 2013, married same sex couples began filing joint tax returns or as "married filing separately" at the federal level because of the Windsor ruling. You also filed jointly at the state level if the state you resided in recognized your marriage. If you lived in a state that did not recognize your marriage, then you each filed as a single tax status in those states.
Then the 2015 Obergefell decision changed the landscape again. Since all states must begin recognizing same sex marriage, you were able to file jointly in the state in which you reside for 2015. If you had not been able to file jointly in 2013 and 2014 in your state, you checked out the possibility and advantages of filing amended state returns for those two years.
For 2015 and later, the tax filing rules are the same as for all married couples for federal and state. You are filing a joint tax return or electing to file separately as married persons. If you have children, the claiming of those children as dependents are simply listed on one return. You can use the child tax credit, the adoption credit, and perhaps the earned income credit as a few of the same sex marriage tax benefits used by all married couples.
Gift and estate taxation benefits extend to all married couples.
Legally married couples are exempt from almost all federal taxes on money or property transfers between them. This includes during your lifetimes, or after death. Beginning in 2013, this applies to all legally married same sex couples, as well.
The current federal gift and estate tax laws allow a lifetime exclusion of $5.45 million for 2016. This amount is set to adjust annually for inflation. This means that every person can give in the form of gifts or bequests, during life or at death, this amount of money, free of federal tax. If you give more than that during your lifetime, and/or leave more than that at your death, you will owe an estate and/or a gift tax.
As one of the same sex marriage tax benefits, this means that as a legally married couple, you can enjoy a lifetime of gifting to each other, without taxation. At the end of your lives, one spouse can inherit all of the deceased spouse's assets, without taxation. The surviving spouse can use any portion of the deceased spouse's exclusion, which has not been previously used, under the portability provisions of the estate tax laws.
There are state estate tax laws to consider in all of this, as well. Upon marriage, you need to review all of your estate planning documents to see if everything is still appropriate. Are there any previously filed gift tax returns that need to be amended because the gifts were actually to your spouse? Conversations may need to take place with your tax advisor, estate planner, financial advisor, and attorney.
Taxes on employment benefits vanish; more same sex marriage tax benefits.
Prior to 2013, just heterosexual married couples were entitled to tax free health insurance benefits for their spouses and children through their job. Now, one of the same sex marriage tax benefits, is that all married couples can receive this employer provided benefit exempt from federal and state taxes.
If your employer provided health coverage for your spouse and included that value in your taxable income for 2013 and 2014, you probably have already considered the effectiveness of filing amended income tax returns for those years. The amount of spousal benefit included in your income, could be in the thousands of dollars. That may or may not be significant enough for you to file amended returns. Check with your tax advisor for help in determining the best options for you, even at this point, in 2016.
By this time, you have checked in with your company's HR or payroll department, and have changed your withholdings, beneficiaries, and possibly your name, and that the correct method is being used for calculating your health insurance deductions for both you and your spouse.
Social Security laws have been updated.
Same sex marriage tax benefits include spousal and survivor benefits as a married couple. If you are nearing retirement age, then an immediate planning opportunity exists. Younger couples can proactively include these benefits in their retirement planning.
Spousal benefits can be received as long as the couple has been married for at least one year. And survivor benefits can be received if the couple has been married for at least nine months. These same sex marriage tax benefits will amount to several hundred thousand dollars.
Notify Social Security as to any name change prior to filing your income tax returns. As of March 2016, Social Security is processing some retirement, surviving spouse and lump-sum death payment claims for same sex couples. They encourage you to apply for benefits, even if you aren't sure you are eligible. Timely application will protect you against the loss of any potential benefits.
Retirement planning considerations.
For tax-qualified retirement plans, a same sex spouse must consent to a participant’s designation of any other beneficiary. Absent such an affirmative designation, a participant’s same sex spouse will be the default beneficiary. For example: if one spouse intends to leave this benefit to a non-spouse, such as a mother, brother, or child, spousal consent is required to effectuate these wishes.
And any employers that haven’t done so may still need to amend plan language that was written to exclude same sex spouses. All Windsor amendments generally must have been adopted by December 31, 2014. Consult with your financial advisor if you have failed to do so.
Leave, fertility and other benefits in employer documents need updating.
Employers should ensure that language is gender-neutral as regards to adoption assistance, fertility benefits, and parental or other leave. Under the Family and Medical Leave Act (FMLA), unpaid leave must be given to care for same- or opposite-sex partners on an equal basis. Employers should consider gender-neutral language in their leave plans, such as ‘primary caregiver’ and ‘secondary caregiver'.
And finally:
Before any major life event, consult with your tax advisor, your financial and estate planner, and your attorney. Discuss wills and intended outcomes. Smolin's advisors are here to help in all stages of your financial life.