Recently, in Windsor v. U.S., the Supreme Court made history by striking down a key provision in the Defense of Marriage Act (DOMA). Although DOMA wasn’t typically viewed as a tax law, it carried significant tax consequences for married same-sex couples who have traditionally been unable to do things like file a joint return or take advantage of a number of favorable estate-planning provisions. The Supreme Court’s decision means that the federal government, including the IRS, must now treat same-sex couples who are legally married in states that permit same-sex marriage the same as their heterosexual counterparts. However, the Court’s decision also raises a number of unanswered questions, including whether and to what extent it will apply retroactively, and how conflicts between state laws will be resolved.

in 1996, Congress enacted, and President Clinton signed into law the Defense of Marriage Act. Section 3 of DOMA 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 based on the taxation of an estate of a same-sex couple from New York challenged Section 3 and prevailed in the district court and again in the Second Court of Appeals. In a majority opinion delivered by Supreme Court Justice Kennedy, the Supreme Court held that DOMA Section 3 was unconstitutional deprivation of equal protection. It should be noted that Section 2 of DOMA, allowing states to refuse to recognize same-sex marriages performed under the laws of other states, wasn’t at issue in this case.

Although there was difficulty and confusion in applying tax law for same-sex couples prior to this decision, it has not eased the complexity encountered in reporting and complying with federal and state tax laws with regard to same-sex couples. While the decision makes clear that the federal government must recognize a lawful same-sex marriage, a number of issues remain unanswered including the following:

• It is unclear whether the IRS must apply the decision retroactively in which the limitations period is open, retroactively only in cases where protective refund claims were previously made, or only going forward.
• The Court left open the question of which state law is relevant for determining whether a same-sex couple is married. It is unclear whether the federal government will recognize a same-sex couple as married where they were married in a state allowing same-sex marriages, but are domiciled in a state that does not recognize such marriages. A stronger case for federal recognition may arise where the couple was married and resided in a state recognizing same-sex marriages, and later moved to a state that does not recognize same-sex marriages. Presumably, the IRS will address these issues in guidance.
• It is unclear what effect, if any, the Court’s opinion will have in states that have marriage-equivalent domestic partnerships or civil unions, which may not fall within the court’s “lawful marriages” terminology. Following the Supreme Court’s Windsor decision, the IRS may conclude that same-sex civil union partners and same-sex domestic partners in marriage equivalent states (Colorado, Hawaii, Illinois, Nevada, New Jersey and Oregon) could file joint federal tax returns.

The following are among the tax breaks newly available to legally married same-sex couples:

• The right to file a joint return, which can produce a lower combined tax than the total tax paid by the same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners);
• The opportunity to get tax-free employer health coverage for the same-sex spouse;
• The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries; and
• As was the subject in the Windsor Case, very attractive estate tax provisions that are available to married couples have now been extended to married same-sex couples.

As with almost all new complex tax law, these new provisions bring about a great deal of confusion and uncertainty as to application. I am sure that as these new provisions come into practice, many cloudy issues will be resolved. I am also sure that just as many new issues will arise. Stay tuned…I will keep you posted.