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The Tax Implications of the Supreme Court’s Same-Sex Marriage Decision


8/5/15

Synopsis

In a historic 5-4 decision, the Supreme Court ruled that same-sex couples nationwide have a constitutional right to marriage protected by the Due Process and Equal Protection clauses of the 14th Amendment.

While this case is not a tax case, this decision has an impact on the tax, estate planning, and employee benefit opportunities available to same-sex married couples.

Issue

Background

United States v. Windsor

In many ways, the decision is a continuation and expansion of a previous Supreme Court same-sex marriage case, United States v. Windsor. The Windsor decision found that Section 3 of the Defense of Marriage Act of 1996 (DOMA) was unconstitutional. Section 3 of DOMA defined marriage, for federal law purposes, as being between a man and a woman. The Supreme Court in Windsor struck down Section 3 of DOMA, holding that it was an unconstitutional deprivation of liberty and equal protection in violation of the 5th Amendment of the Constitution. The ruling meant that same-sex couples could now file joint federal tax returns and claim federal tax benefits in states that legally recognized same-sex marriage. While Section 3 of DOMA was ultimately struck down by the Supreme Court, Section 2 of DOMA was never considered by the Court. Section 2 declares that states do not have to recognize same-sex marriages originating in other states.

Obergefell v. Hodges

The Obergefell case was originally six lawsuits from four states (Michigan, Kentucky, Ohio, and Tennessee) that the Sixth Circuit consolidated into one case. These States all defined marriage as being between one man and one woman. The plaintiffs in the case were same-sex couples who contended that their 14th Amendment rights were violated by denying their right to marry or refusing to give their marriages, which were lawfully performed in another State, full recognition. The district courts ruled in favor of the plaintiffs but the Sixth Circuit reversed.

Supreme Court Holding

The Supreme Court addressed two issues in the Obergefell case: 1) whether the 14th Amendment requires a State to allow a same-sex couple to marry; and 2) whether the 14th Amendment requires a State to recognize a same-sex marriage performed out-of-state.

The Supreme Court held that the state laws banning same-sex marriage are invalid to the extent they exclude same-sex couples from civil marriage on the same terms and conditions as opposite-sex couples. Therefore, a state must license a marriage between same-sex couples. The Court also held that there was no legal justification for a state to refuse to recognize a lawful same-sex marriage performed in another state.

State Tax Filing and Employee Benefits

As a result of the Windsor decision and Rev. Rul. 2013-17, same-sex married couples have been able to file as married for federal tax return purposes since 2013. The Obergefell case affects the 14 states that do not recognize same-sex marriage. Same-sex couples with filing obligations in more than one state had to file married in one and unmarried in another. The Obergefell decision reconciles this conflict and provides uniform treatment to taxpayers. Same-sex couples are now considered married for both state and federal tax return purposes and may file state joint returns in any state.

The Obergefell decision applies retroactively. Therefore, there may be an opportunity for individuals and employers to claim state refunds. Same-sex couples may now leave a surviving spouse a tax-favored rollover of an individual retirement account. Same-sex married couples may now avail themselves of the same health and investment plan benefits as couples in a traditional marriage. Employers will need to review and change their benefit plans accordingly and will need to make adjustments to state income tax withholding amounts for same-sex couples.

The Obergefell decision does not impact same-sex or opposite-sex couples in civil unions or domestic partnerships. These arrangements are typically not treated as a marriage for federal or state law purposes.

Estate and Gift Taxes

Same-sex spouses may now make unlimited gifts to each other without being subjected to state gift tax consequences. The spousal exclusion now applies to same-sex spouses at the state level. In addition, the right to inherit pursuant to a state’s intestacy statute, in the event there is no will, is now applicable to married same-sex couples.

What Does CohnReznick Think?

Many conflicts have now been resolved and there may be opportunities to file amended state tax returns and revise estate plans including preparing new wills.

Contact

Please contact your CohnReznick professional to discuss how this ruling may impact you or contact Kenneth Kanter, Partner and Tax Practice Managing Director, at kenneth.kanter@cohnreznick.com or 973- 364-6668.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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