SUPREME COURT’S DOMA RULING HAS IMPORTANT TAX IMPLICATIONS

Some of the implications of the Supreme Court’s DOMA ruling are obvious, while others are not.  For starters, same-sex married couples will now be able to make decisions regarding filing a joint return that were previously denied them.  In an odd way this is going to bring equality in the tax code.  Before the court’s ruling, a same sex couple was required to file single, however in tax resolution cases when one person owes back taxes, the IRS treated the couple as married if they lived in community property states like California.  The ability to pay by the delinquent partner was increased by 50% of the income and assets of the other partner

The distinction between married and unmarried status is pervasive in federal tax law, even though the code does not define such terms as husband, wife or married.  The issue comes into play in connection with income tax rates, the treatment of capital losses, credits for the elderly and disabled, taxation of Social Security benefits, and a number of other provisions.

Marital status also plays a key role in the estate and gift tax laws and in the part of the tax code dealing with taxation on the sale of property.  For estate tax purposes, property transferred to one spouse as the result of the death of another spouse is deductible for purposes of determining the value of the decedent’s estate.  In the case heard by the court, U.S. v. Windsor, Windsor owed more than $363,000 in federal estate tax on her wife’s estate, since she was not covered by the spousal deduction. She would have owed zero estate tax with the benefit of the spousal deduction.

Moreover, gifts from one spouse to another are deductible for purposes of the gift tax, and gifts from one spouse to a third party are deemed to be from both spouses equally. Transfers of property from one spouse to another or to a former spouse if the transfer is incident to a divorce are permitted without any recognition of gain or loss. These provisions permit married couples to transfer substantial sums to one another, and to third parties, without tax liability in circumstances in which single taxpayers would not enjoy the same privilege. 

Another implication is the IRS will have their hands full processing mountains of amended tax returns; amending returns from same sex couples who originally filed single.