The Tax Implications of DOMA (Defense of Marriage Act)

On June 26, 2013, the Supreme Court made some changes to the Defense of Marriage Act (DOMA). The decision has several tax implications for those affected.....

DOMA Changes:
1.   Same-sex couples can now file joint federal tax returns if the couple lives in a state that recognizes their marriage.

2.   Same-sex couples should entertain the idea of filing amended returns (to file joint) for prior tax years in which they were married and for which the statute of limitations remains open (generally 3 years).

3.   Tax-free employer provided benefits to married same-sex partners that were previously includible in income under federal law are now excludible from income, so refunds can be claimed on this basis.

4.   The estate of a partner in a same-sex marriage is entitled to the marital deduction, which means the partner’s estate passes tax-free to his or her spouse.

5.   Married same-sex partners are now eligible to receive federal benefits if their partner is a federal employee, as well as partners now being eligible for social security survivor benefits upon the death of a partner.

Of course all of these changes raise many questions in how the ruling will be implemented. These changes will take time as they are very difficult to put in play.

DOMA Uncertainties:
1.   It is uncertain whether a same-sex couple that lives in a state that doesn't recognize same-sex marriages but travels to a state that does recognize such marriages and gets married, will be treated as married for federal tax purposes.

2.   If an individual is married to a same-sex partner in a state like New York that recognizes such marriages, the fair market value of employee benefits received as a result of such marriage are excludible from the non-employee spouse’s income. But, it’s unclear what happens if the employee is transferred to a state that doesn't recognize same-sex marriages.

3.   For the current year, it’s not clear what happens if one partner in a same-sex marriage has already filed his or her 2012 Form 1040 as single while the other partner is on a valid extension, with the expectation of filing by the October 15 deadline. Assuming they don't choose to amend both to married filing jointly (which presumably would be allowed), can the spouse on extension file as single or is the spouse required to file as married filing separately?

4.   If one partner in a same-sex marriage amends his or her return from single to married filing separately (e.g. to reclaim imputed income from a spouse’s employment benefits), it’s unclear whether the other is also forced to amend his or her return.

We expect there will be a lot of future guidance on these and other issues.

While the full impact of the Supreme Court’s decision will not be known for a while, the above is important information to keep on your radar.

Feel free to call us if you would like to discuss how this may affect your specific situation. And of course, please share this article with anyone you think may benefit from knowing some of these DOMA changes.