In a highly anticipated decision, the Supreme Court struck down Section 3 of the Defense of Marriage Act, which required same-sex spouses to be treated as unmarried for purposes of federal law.
This case (U.S. v. Windsor, et. al., 111 AFTR 2d 2013-2385, June 26, 2013) will have far-reaching tax implications for married same-sex couples.
The Defense of Marriage Act (DOMA) was enacted in 1996. Section 3 defines marriage for purposes of administering federal law as the “legal union between one man and one woman as husband and wife.” It further defines “spouse” as “a person of the opposite sex who is a husband or wife.”
The Windsor case is an estate tax case. In 1963, Edie Windsor met Thea Spyer, and they lived together in New York City. In 1993, they registered as domestic partners in New York City, and in 2007, they got married in Canada.
Spyer died in 2009, leaving her estate to Windsor. Because of DOMA, the estate did not qualify for the unlimited marital deduction. As a result, Spyer’s estate had to pay $363,053 in federal estate tax. Windsor paid this amount in her capacity as executor of the estate and then sued for a refund.
As a result of this decision, the following are among the tax issues that will affect legally married same-sex couples:
- Right to file a joint return
- For those filing separate returns, requirement to use the higher “married filing separately” tax rates
- Opportunity to get tax-free employer health coverage for the same-sex spouse
- Opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse
- Deductibility of alimony paid to a former spouse
- Availability of the innocent spouse protections
- Availability of the gift and estate tax marital deductions
Married same-sex couples who filed separate federal returns because of DOMA should consider filing amended returns or protective refund claims where applicable. The extent to which this decision will be applied retroactively is not clear, but it may be worth filing protective refund claims in situations when the statute of limitations could expire before the issue is resolved.
It is unclear what the impact of the Windsor decision will be on same-sex couples in state-sanctioned domestic partnerships or civil unions. However, it may be worth filing protective refund claims in the event that the issue is favorably resolved.