On June 26th the Supreme Court issued Windsor v. US, expanding availability of federal tax benefits to legally married same-sex couples.
A little background: Edith Windsor inherited her same-sex spouse's entire estate after her spouse's death in 2009. Edith was barred from claiming the federal estate tax exemption for surviving spouses by the federal Defense of Marriage Act (DOMA) which defines marriage and spouse as excluding same-sex partners. Windsor paid $363,053 in federal estate taxes on the inheritance. Had she been allowed the exemption, she would have paid no federal estate taxes. In a 5-4 decision the Supreme Court ruled DOMA is unconstitutional as a deprivation of Due Process. The Court further ordered the IRS to refund Windsor the estate taxes paid.
The decision to strike down DOMA will have far reaching impacts on tax and entitlement programs that you should be aware of, including:
Gift taxes and estate planning
Other married same-sex couples should also amend their estate plans to take advantage of the federal estate tax exemption. As illustrated by the Windsor case, these provisions can yield significant tax savings. Same-sex married couples should now be able to pass assets to their spouse tax-free after death.
Married same-sex couples who filed separate federal returns should consider filing amended returns with claims for refund, where applicable. Currently, several tax breaks are afforded to married individuals. The tax benefits include a higher standard deduction, greater exemption for home sale profits, and an ability to contribute to a spouse's IRA. In addition, while it's unclear what the impact of the opinion will be on same-sex couples in state-sanctioned domestic partnerships or civil unions, it may well be worth filing protective refund claims in the event that the issues are favorably resolved.
Under DOMA, employer health benefits provided to same-sex spouses are taxable. Now, one spouse may be able to move onto the other's more generous plan without incurring taxes. Any individual paying tax on those benefits in the last three years should consider filing an amended return.
Have questions regarding the time-sensitive tax planning opportunities available as a result of the DOMA ruling? Call your Berntson Porter tax advisor.