In a 5 to 4 decision, the United States Supreme Court has found that Section 3 of the federal Defense of Marriage Act (DOMA) violates the equal protection clause of the Fifth Amendment of the U.S. Constitution as applied to persons of the same sex who are legally married under the laws of their state (Windsor, S.Ct., June 26, 2013, 2013-2 ustc ¶50,400). The majority opinion, written by Justice Anthony Kennedy, held that DOMA’s Section 3 is unconstitutional as a deprivation of the liberty of the person protected by the Fifth Amendment of the Constitution.
The decision opens the door for same-sex married couples to enjoy many federal tax-related benefits previously available only to opposite-sex married couples. These include income tax benefits, estate and gift tax benefits, taxpayer-friendly employee benefits, and more. Same-sex couples must now also deal with circumstances under the tax law that may create a so-called "marriage penalty." Employers must prepare for extensive changes in the treatment of same-sex couples. And individuals claiming tax credits and other provisions under the Patient Protection and Affordable Care Act are impacted by the decision.
Impact. It is unclear how quickly the IRS and other federal agencies will react to the Supreme Court's decision, or how quickly same-sex couples may need to act to protect certain rights. President Obama has directed all federal agencies , including Treasury and the IRS, to revise their regulations to reflect the Supreme Court's decision as soon as possible. Many tax professionals had been advising same-sex couples to file protective refund claims in anticipation of a favorable ruling from the Supreme Court. This is one of several strategies that practitioners and taxpayers should follow up on, as well as filing amended returns before the applicable limitations periods expire on back tax years. The decision to strike down.
Federal tax consequences
Under federal income tax rules, same-sex married couples can now presumably enjoy benefits that had been unavailable to them because of DOMA. On the other hand, certain strategic advantages previously enjoyed by same-sex married couples who filed as single individuals under the federal tax laws, have now likewise ended.
Comment. Aside from the fact that it was a federal tax refund claim in Windsor that triggered the litigation that found itself before the U.S. Supreme Court, the opinion focused on Constitutional rights and privileges, without any technical discussion of the tax law itself. The Court judged DOMA for its impact on "over 1,000 federal statutes and the whole realm of federal regulations." Very little was said specifically about federal tax law beyond that. Nevertheless, the federal tax law is clearly among those "federal statutes and regulations" impacted most directly by the Supreme Court's holding.
Impact. Same-sex couples who were married under state law for years prior to 2013 now need to decide whether to amend those prior-year returns still open under the Code's statute of limitations, to reflect a change from unmarried to married filing status. Same-sex married couples also should consider updating their estate plans, based upon the estate and gift tax impact of Windsor.
Income tax benefits and disadvantages
Because of the Supreme Court's decision, the same tax benefits and disadvantages faced by just-married, opposite-sex couples--in changing from filing as separate, unmarried individuals to filing as married filing jointly (or married filing separately)--are now shared by same-sex married couples. Likewise, however, those same-sex couples not married under state law continue to be subject to the same disadvantages and benefits, and face many of the same strategic decisions, as unmarried heterosexual couples under the federal tax law.
Caution. As mentioned, above, resolution is pending on the issue of whether recognition or non-recognition of a same-sex marriage in the State in which the same-sex couple currently reside controls whether the IRS will treat the couple as married for federal tax purposes. Most federal agencies have defined marriage in the past based on a couple's residency and not where they were married.
Other same-sex couple income tax issues
Being married for federal tax purposes--exclusive of the right to any particular filing status--can also give rise to additional tax benefits and restrictions. The following situations may be particularly relevant in the case of married same-sex couples after the Supreme Court's Windsor decision:
Dependency Exemptions. In 2012, the IRS explained on its website that if a child is a qualifying child under Code Sec. 152(c) and both parents are same-sex partners, either parent, but not both, may claim a dependency deduction for the qualifying child if separate returns are filed. If both parents can otherwise claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time. If the child resides with each parent for the same amount of time during the tax year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.
Employee benefits
Perhaps in no area outside of income taxes is the impact of the Supreme Court's decision more expansive than on employee benefits. Because of DOMA, employers that allow an employee to add his or her same-sex spouse to their health plan had to impute income to the employee for federal income tax purposes equal to the fair market value of health coverage provided to the same-sex spouse. If the same-sex spouse qualified as a dependent, this rule did not apply. DOMA also precluded same-sex married couples from sharing the same benefits of health flexible spending accounts, health savings accounts and health reimbursement arrangements available to opposite-sex married couples.
Impact. Employers in states that allow same-sex marriage will presumably need to amend plans to cover same-sex married spouses. The IRS is expected to provide guidance on the timing of plan amendments, including the issue of whether benefits need to be made retroactive or only prospective from the date of the Windsor decision.
Domestic partners. Many employee benefit plans in the private and public sectors refer to domestic partners rather than same-sex spouses. The definition of domestic partner varies. In some cases, it may encompass opposite-sex domestic partners as well as same-sex domestic partners.
Comment. The federal government's Office of Personnel Management defines domestic partner for purposes of federal employee benefits as a committed relationship between two adults, of the same sex.
Tax Treatment. Domestic partners who are not married under state law are not treated as spouses for federal income tax purposes. As a result, an employee must continue to pay taxes on the fair market value of the coverage for the employee's domestic partner (whether the domestic partner is a same-sex partner or an opposite-sex partner). However, domestic partner benefits are tax-free if the employee's partner qualifies as a dependent under Code Sec. 152; that is, if benefits are paid for a person who meets the following requirements:
- Receives more than half of his or her support from the taxpayer for the year.
- Uses the taxpayer's home as the principal abode and is a member of the taxpayer's household during the entire tax year.
- Is in a relationship with the taxpayer that is not a violation of local law.
Impact. The Supreme Court's decision may open the window to refunds of taxes paid by employees on income imputed to employees for same-sex married spouse and refunds of payroll taxes paid by employers on that income. FICA tax refund claims by employers and employees for prior, open years may also be possible.
Comment. Some employers have attempted to equalize the treatment between opposite-sex couples and same-sex couples by providing so-called gross-ups to cover the additional taxes that same-sex couples pay on health benefits. Many employers require an employee to certify that a domestic partner qualifies as a dependent under Code Sec. 152.
Cafeteria Plans. Employer contributions to a cafeteria plan are usually made under a salary reduction agreement between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the participant. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA taxes. However, pre-tax dollars could not be used to pay for coverage of a same-sex spouse because of DOMA. This now should change as a result of the Court's decision.
Health Flexible Spending Accounts. A health flexible spending arrangement (FSA) is a form of cafeteria plan benefit, funded by a voluntary salary reduction arrangement with pretax dollars. The benefits are subject to an annual maximum and an annual "use-or-lose" rule. Qualified medical expenses are those incurred by, among other individuals, the employee and his or her opposite-sex spouse. Because of DOMA, only opposite-sex married couples could use health FSA dollars for a spouse's qualified medical expenses.
Impact. The Supreme Court's decision to strike down DOMA presumably opens the door to same-sex married couples being able to use FSA dollars for qualified medical expenses of both spouses. The IRS is expected to issue guidance.
Comment. A cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500 for plan years beginning after December 31, 2012.
Health Savings Accounts. A health savings account (HSA) is a vehicle that eligible taxpayers can use to pay for or reimburse qualified medical expenses. Contributions to an HSA are tax-deductible (employer contributions are excluded from gross income) and distributions are tax-free if used to pay for qualified medical expenses. To be an eligible taxpayer, the individual, among other requirements, must be covered by a high-deductible health plan (HDHP), not enrolled in Medicare, not claimed as a dependent on another taxpayer's return. Qualified medical expenses are those incurred by, among others, the taxpayer and his or her spouse. Because of DOMA, only opposite-sex married couples could HSA dollars for a spouse's qualified medical expenses.
Impact. With DOMA being struck down by the Supreme Court, same-sex married couples will presumably be able to use HSA dollars for qualified medical expenses of both spouses.
COBRA/FMLA. Federal law requires that certain employers offer continuation of health care coverage to employees, their spouses, and families ("COBRA coverage"). Current federal laws related to COBRA coverage do not apply to same-sex married couples. The DOMA definition of spouse precludes the extension of Family and Medical Leave Act (FMLA) leave benefits to opposite-sex partners. After the Supreme Court's decision in Windsor, these rights presumably would now be available to same-sex spouses.
Retirement plans. The Internal Revenue Code provides extensive protections for the spouse of an employee to share in the employee's retirement benefits payable through Code Sec. 401(k) plans and other qualified plans. These protections would presumably now apply to the same-sex spouse of an employee.
Affordable Care Act
The Patient Protection and Affordable Care Act, signed into law by President Obama in 2010, set in motion a host of changes to the delivery of health care and health insurance coverage. Some of the changes already in place affect health savings accounts (discussed above in this Briefing). Other changes are scheduled to take effect after 2013.
Individual Mandate And Penalty. Beginning in 2014, the Affordable Care Act imposes a penalty on individuals who do not carry minimum essential health coverage for one or more months, subject to certain exceptions. Married taxpayers who file a joint return are jointly liable for any penalty that may be imposed upon either spouse. The penalty does not apply in certain cases, such as in the case of individuals whose household incomes are below their filing thresholds. Now that DOMA has been struck down, same-sex married couples presumably will be treated in the same manner as opposite-sex married couples for purposes of the individual mandate and its penalty.
Comment. The Affordable Care Act prohibits the IRS from using liens or levies to collect any unpaid penalty. The IRS cannot levy on the property of one spouse to satisfy an unpaid penalty of the other spouse.
Premium Assistance Tax Credit. Beginning in 2014, the Code Sec. 36B premium assistance tax credit is scheduled to be available to those qualified individuals and families who are not offered minimum essential coverage and as a result obtain coverage through a health benefit exchange. The Affordable Care Act provides for advance payment of the credit. Taxpayers who are married at the end of the tax year must file a joint return to claim the credit. Because DOMA has been struck down, same-sex married couples will presumably need to file a joint return to claim the credit.
Code Sec. 45R Credit. For tax years 2010 through 2013, eligible employers may claim a credit of 35 percent of health insurance premiums paid (25 percent for small tax-exempt employers). In tax years beginning after 2013, an employer must participate in an insurance exchange in order to claim the credit. The credit is scheduled to increase to 50 percent for small business employers (35 percent for small tax-exempt employers) after 2013 (but will terminate after 2015). Certain family members are not treated as employees for purposes of the credit. Under DOMA, these restrictions did not apply to same-sex married couples because their marriages were not recognized for federal purposes. With DOMA's demise, a same-sex spouse who satisfies any of these criteria would presumably not be treated as an employee for purposes of the credit.
Social Security Benefits
Because of DOMA, same-sex married couples did not have the same benefits under Social Security that opposite-sex married couples have enjoyed for many years. Unlike opposite-sex couples, for example, there are no survivor benefits for the surviving spouse of a same-sex married couple. Also, the divorced spouse of a formerly married same-sex couple cannot not claim benefits based on the earnings of his or her ex-spouse.
Impact. The Social Security Administration (SSA) has based federal rights to benefits on whether marital rights exist in the couple's current state of residence rather than the state in which they were married. The impact of Windsor on the manner in which federal agencies will treat Social Security benefits remains to be sorted out.
Survivor Benefits. When an individual dies, his or her surviving spouse may be eligible for Social Security benefits if the surviving spouse is age 60 or older, age 50 or older and disabled, or any age if he or she is caring for the decedent's child who is younger than age 16 or disabled and entitled to Social Security benefits on the record of the deceased individual. With DOMA having been struck down, survivor benefits previously available only to opposite-sex married couples are now presumably available to same-sex married couples. The SSA is expected to provide guidance.
Divorced Spouses. If an individual is divorced, his or her ex-spouse may qualify for Social Security benefits based on that individual's earnings. Generally, a divorced spouse must have been married to the individual for at least 10 years and have been divorced at least two years. Additionally, the divorced spouse must be at least age 62, unmarried and ineligible for an equal or greater benefit based on his or her own earnings or the earnings of someone else. These benefits are now presumably available to divorced individuals who were previously in a same-sex marriage. The SSA is expected to provide guidance.
Death Benefits. The SSA pays a onetime death benefit of $255 to the decedent's surviving spouse in an opposite-sex marriage or minor child. The SSA will presumably now pay the one-time death benefit to the surviving spouse in a same-sex marriage.
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