Article by Thomas D. Begley Jr.

This is the first of a two-part article on tax and public benefits planning for same-sex couples.  In the 2013 case of United States v. Windsor,[1] the Supreme Court of the United States declared §3 of the Defense of Marriage Act (DOMA) unconstitutional.  Section 3 was drafted to prohibit the payment of federal benefits to same-sex married couples.  It should be noted, however, that Windsor did not apply to §2 of DOMA, which prohibits any state from being forced to recognize the actions of another state on the issue of same-sex marriage.  As a result, there is importance attached to the state in which the marriage was celebrated and also to the state in which the couple is domiciled.  As of the writing of this article, the following states recognize same-sex marriages:  California, Connecticut, Delaware, District of Columbia, Hawaii, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Washington.  For purposes of federal taxation, federal law applies and the IRS has not taken a state-by-state approach to the issue of validity of the marriage.[2]  For IRS purposes, if the marriage was celebrated in a state recognizing same-sex marriage, the IRS will deem the marriage to be valid regardless of the state in which the couple resides.  If a couple marries in New Jersey and remains domiciled in New Jersey, New Jersey would be the state of celebration and also the state of domicile, and the IRS would recognize the marriage for federal income, estate, and gift tax purposes.  If the couple married in New Jersey but moved to Pennsylvania, a state that does not recognize same-sex marriages, the IRS takes the position that federal law trumps state law and the same-sex couple would be subject to the benefits and burdens of any married couple with respect to federal income, estate, and gift tax purposes.

For income tax purposes, some of the issues involved are:

  • Joint Returns.  Same-sex couples, regardless of their domicile, will be permitted to file income tax returns jointly so long as the marriage was celebrated in a state that recognizes same-sex marriages.  If the same-sex couple moves from New Jersey to Pennsylvania, Pennsylvania would not be required to recognize the marriage and would require that each member of the couple file separate state income tax returns.[3]  For federal income tax purposes, the married couple will be subject to the “marriage penalty” (i.e., the increased taxation to which the married couple may be subject by virtue of their combined incomes on their Federal 1040).  The same-sex couple will also be able to enjoy the many benefits of married filing jointly such as the higher likelihood of increased itemized deductions if the couple incurs significant medical expenses.
  • Sale of a Principal Residence.  Capital gains of up to $250,000 per person or $500,000 for a married couple are excluded from the calculation of gain on the sale of a primary residence so long as the taxpayer used the home as his or her primary residence for two out of the five years preceding the date of the sale.[4]  However, the creditor protection associated with tenancy by the entirety planning should be available for same-sex couples domiciled in New Jersey, but would not be available for same-sex couples domiciled in states that do not recognize same-sex marriages.  Real estate law is a state law function.
  • Alimony and Child Support.  Alimony and child support will become an issue with respect to same-sex couples.  In the heterosexual community, 50% of all marriages end in divorce.  There is no reason to believe that the same ratio would not apply in the same-sex community.  If a same-sex couple becomes divorced, there may be an obligation for spousal support through alimony or for child support.  In the event that alimony and child support are subject to federal income tax laws, they will be treated the same as any other married couple no matter where the couple is domiciled for federal income tax purposes.
  • Amend Prior Returns. It may be possible for same-sex couples to amend prior returns.  If a couple celebrated a marriage in a state recognizing same-sex marriage they may be entitled to a refund had they filed as married filing jointly.  It is suggested that same-sex married couples consult with their tax preparers.
  • Federal Estate Tax.  Windsor was a federal estate tax case.  Under both Windsor and the IRS Notice, for federal estate tax purposes the marriage will be recognized regardless of the state of domicile.  The portability of the unused exemption for the first-to-die spouse will be available.  Planning to achieve a basis adjustment on death will be possible.
  • Federal Gift Tax.  For gift tax purposes, joint gifting will now permit same-sex couples to use the annual exclusion more aggressively.  For 2014, the annual exclusion is $14,000.  If the other spouse joins in the gift, this can be increased to $28,000 per person per year.

In conclusion, Windsor will have a positive effect on federal income, estate, and gift tax planning for same-sex married couples.

[1] 111 AFTR 2d 2013-2385 (2013).

[2] IRS Notices 2014-1, 2014-2; IRB 270.

[3] IRS Notice 2014-1.

[4] IRC §121.

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