The Supreme Court, in a 5-4 decision delivered by Justice Kennedy, has held, in a case involving four state-wide bans on same-sex marriage, that the Fourteenth Amendment requires a State to license a marriage between two people of the same sex. And, since same-sex couples may now exercise the fundamental right to marry in all States, there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State. Although the decision made only passing reference to tax implications, the wide-reaching social, political, and economic ramifications inherent in this decision include a number of significant tax issues.

Some brief background – If you will recall, in 2013, in a 5-4 opinion, the Supreme Court, in Windsor, struck down section 3 of DOMA as an unconstitutional deprivation of equal protection.

Following Windsor, the IRS issued a Revenue Ruling which provided that a same-sex couple that was legally married in a domestic or foreign jurisdiction that recognized their marriage would be treated as married for federal tax purposes, regardless of where they currently live. Further, it provided that lawfully married same-sex couples must file as married couples for federal income tax purposes.

In response, many States issued guidance after the IRS ruling that required same-sex couples married in other states to file separate state income tax returns, even if their filing status was married filing jointly for federal income tax purposes.

Implications of the Court’s recent ruling – In addition to the many and varied social, political, economic, etc. ramifications of the Court’s decision, there are also several tax implications. Just a few are noted below.

Same-sex married couples will now enjoy a simplified tax filing environment. Since the Windsor decision and the Revenue Ruling which followed, same-sex married couples must generally file their federal tax returns as married (starting with the 2013 tax year, as well as for earlier years where the original return is filed on or after Sept. 16, 2013). However, for married same-sex couples who live in a State that didn’t recognize same-sex marriage, they had to file their State returns as unmarried taxpayers. This conflict caused couples in these States to incur added time, effort, and expense. Many State tax returns used the federal return as a starting point of sorts, and some States that didn’t recognize same-sex marriage required taxpayers to prepare a “dummy” federal return for purposes of completing their State return.

In this regard, the Court’s recent decision essentially makes Windsor applicable not only for federal tax returns but for State returns as well. Thus, those in a same-sex marriage will be considered married for State and federal return purposes, eliminating the need for “dummy” forms.

The reverse problem may arise for same-sex couples who aren’t married, but are in a State-sanctioned domestic partnership or civil union or similar arrangement—they can’t file a joint federal return, but may be able to file a joint State return.

Same-sex couples who reside in States that didn’t previously allow same-sex marriages can now marry. Same-sex couples who were married in States that allowed such but moved to States that didn’t recognize same-sex marriages are now married for State purposes. Some significant provisions common to all states include, among other things:

• Filing status. Filing a joint return may, but won’t necessarily, result in lower taxes.
• Deductions. The decision to itemize deductions or claim the standard deduction is made as a marital unit.
• Tax credits. Many tax credits phase out when income reaches a certain threshold; married taxpayers could be eligible for credits that they weren’t before or, conversely, ineligible for credits that they could receive before.

In addition, in States that impose estate and gift taxes (or inheritance taxes), many have favorable provisions for transfers to or involving a spouse similar to the federal rules, such as a marital deduction or the ability to make split gifts.

A unique problem may arise for same-sex couples who are in a State-sanctioned domestic partnership or civil union or similar arrangement. Presumably, with all States now required to provide same-sex marriages, there is likelihood that in many (if not all) cases, these marriage “substitutes” may eventually fade away. If that’s the case, such same-sex individuals may have to choose if they want to be married for federal tax purposes—a consideration that needs to take into account many factors.

© Checkpoint Newsstand – June 29, 2015