The U.S. Supreme Court’s June 26 decision to strike down Article 3 of the Defense of Marriage Act (DOMA) broadened the definition of marriage to include same-sex couples. Same-sex couples who are married in the U.S.–or abroad where gay marriage is legal–are entitled to federal benefits, no matter where they live. These benefits, previously available only to heterosexual couples, include immigration benefits and, as of late August, federal tax benefits as well.
“State of Celebration” Versus State of Residence
On August 29th, the Treasury Department and the Internal Revenue Service (IRS) announced the decision to extend federal tax benefits to same-sex couples regardless of state of residence. The benefits will be applied starting September 16th. The decision to honor where the couple was wed (the “state of celebration”) rather than where the couple resides echoes a similar decision made in 1958 regarding common-law marriage. As of now, same-sex marriage is legal in 13 states, Washington, D.C., and in 15 countries around the world. Couples marrying in those places can live anywhere and still receive federal tax breaks.
The case United States v. Windsor was brought to the Supreme Court over this issue. The defendant, Edith Windsor, married her wife in Canada, where same-sex marriage was legal at the time, but the couple lived together in New York State where it was still illegal. When Windsor’s wife died, she was made to pay death taxes on the estate. She would not have had to pay those taxes if the federal government had recognized their marriage.
Federal Tax Benefits for Same-Sex Spouses
Beginning with the 2013 federal tax return, same-sex couples must choose “married filing jointly” or “married filing separately” status and may take the appropriate standard deductions. They may also amend previous tax returns – usually for the previous two or three years – to claim refunds they would have received had they filed as a married couple. Here are some other big ways same-sex couples’ finances will be affected:
Health insurance. Now an individual in a same-sex marriage whose health insurance covers their spouse no longer has to pay tax on the value of the insurance. They can also use pretax dollars to pay for coverage, which was not an option before.
Contributions to IRAs. The current individual limit on IRA contributions is $5,500, but married couples can contribute $11,000, even if only one partner earned income.
Marital deduction and other gifts. The “marital deduction” allows spouses to transfer assets to each other without paying federal estate or gift taxes. As for transferring money to a non-spouse, there is a current limit of $14,000 per year per person. Through “gift-splitting,” married couples can combine their limits and give up to $28,000 from a joint account or an individual account without the recipient having to pay gift taxes.
Other relevant tax issues included are portability (having to do with estate tax exclusion being passed from the deceased spouse to the surviving spouse), exemptions for dependents, and earned income tax credit–among others.
State Tax Laws Remain Unaffected
Married gay couples still have challenges ahead. The decision of the Treasury Department and the IRS affect federal taxes, but state taxes remain unaffected. States where same-sex marriage isn’t legal don’t have to recognize the marriage in the same way and allow couples to file jointly or take advantage of other tax breaks. Each state must decide how to handle this decision. In the meantime, same-sex couples that have married or are planning on marrying soon should seek the advice of a tax professional in their state.
