FEDERAL TAX IMPLICATIONS FOR SAME-SEX COUPLES MARRIED UNDER STATE LAWS

In June of 2013, the U.S. Supreme Court held in U.S. v.  Windsor that provisions of the Defense of Marriage Act (DOMA) were unconstitutional. Prior to this ruling, Section 3 of DOMA required that, for purposes of federal enactments, marriage be defined as the union of one man and one woman and the word spouse be defined as someone of the opposite-sex who is a husband or wife.

As a result of its decision in U.S. v.  Windsor, the Department of the Treasury and Internal Revenue Service ruled that all legal same-sex marriages would be recognized for federal tax purposes, and that, “[f]or federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law (emphasis added), and the term “marriage” includes such a marriage between individuals of the same sex.

It is estimated that same-sex marriage adds $19,359,150 in tax revenue to the coffers of New York state each year. New York passed The Marriage Equality Act in June of 2011, which allows gender-neutral marriages for both same- and opposite-sex couples. Until California passed a similar law in 2013, New York was the most populous state to allow same-sex marriage. In June of 2015, the Supreme Court held in Obergefell v. Hodges that all states must recognize same-sex marriages. This means that employers must adjust state tax reporting and withholding for all employees in same-sex marriages who live in states that did not previously recognize their marriages.

INCOME TAX

Federal recognition of same-sex marriages affects married same-sex couples’ federal income taxes in a variety of ways. All taxpayers in legally established same-sex marriages are required to file as married on any return filed after September 15, 2013, which may affect their marginal tax rates. Other tax effects may include changes in eligibility for a variety of tax credits.

Legally married same-sex couples are now required to file their taxes in the same manner as legally married opposite-sex couples. Same-sex couples must file either as “married filing jointly” or as “married filing separately.” Marriage tax penalties and bonuses are consequences of a progressive tax system, whereby higher ranges of income are subject to higher tax rates. For some same-sex couples, filing their returns jointly could result in increased or decreased income tax liabilities. When filing taxes as a married couple, some married same-sex couples may have a higher tax liability than their combined tax liability when filing as two single, unmarried taxpayers. Other married same-sex couples may benefit from having a lower tax liability when filing as a couple than their combined tax liability when filing as unmarried individuals.

INCOME TAX CREDITS

Marriage can affect the amount of certain tax credits, especially those that benefit taxpayers with children. Generally, tax credits are structured such that the amount of the credit falls when income exceeds a certain threshold, ultimately phasing out to zero. When marriage results in a combined income that is in a credit’s phase-out range (or is so high the taxpayers are ineligible for the credit), the credit amount may be reduced, resulting in increased tax liability.

Some tax credits that are subject to income limitations include the Earned Income Tax Credit (EITC), the Child and Dependent Care Credit, the Child Tax Credit, the Adoption Credit, and Education Tax Credits. Marriage penalties occur when the joint income of the married couple pushes them into the EITC phase-out range or results in the couple being ineligible for the credit. The amount of the child and dependent care credit is limited to no more than the income of the lower earning spouse. If one spouse has no income, the couple generally would not qualify for the credit.

The value of the child tax credit phases out as a taxpayer’s income rises above a certain income level. The phase-out threshold for married couples is less than twice that for FEDERAL TAX IMPLICATIONS FOR SAME-SEX COUPLES MARRIED UNDER STATE LAWSunmarried individuals. As a result, two unmarried individuals might each qualify for the credit but receive a smaller credit or become ineligible for it if married.

The income levels at which taxpayers are ineligible for education tax credits tend to be twice as high for married couples as for singles. The ultimate value of the credit as a result of marriage will depend on the distribution of income among spouses. The adoption credit is generally not allowed when adopting a spouse’s child. Therefore, some same-sex partners who might otherwise have been able to claim an adoption credit are no longer able to do so.

ESTATE TAX

Under the holding in Windsor, a deceased spouse’s estate can transfer all of its assets to a surviving same-sex spouse without incurring any estate tax. Of course, with a spouse, the exemption amount is unlimited. The holding in WIndsor overruled the Defense of Marriage Act of 1996, which contained the restriction that “marriage” and “spouse” applied only to opposite-sex couples. Windsor stated that for estate tax purposes such a restriction was unconstitutional.

In addition to being eligible for unlimited spousal transfers, same-sex couples may also benefit from transferability of exemption amounts to non-spouse beneficiaries. Unlike the unlimited spousal exemption, there is a limit on the amount of an estate which can pass to a non-spouse heir tax-free.

If you are a spouse in a same-sex marriage and have questions about the filing of your taxes and those related tax considerations based upon your marriage, contact the tax experts at Thorgood Law Firm www.thorgoodlaw.com  For a FREE consultation at 212-490-0704.

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