The Supreme Court decision in Windsor v. US has effectively struck down Section 3 of the Defense of Marriage Act retroactively. As such, anyone affected can file amended joint returns for all open years. The normal Statute of Limitations is three years. Therefore, 2010, 2011 and 2012 are all open years. Additionally, if both spouses filed their 2009 returns on extension, that statute is open until October 15, 2013.
According to current IRS rules, the determination of whether a couple is married is based upon state law of their current residence. So a same-sex couple married in a state which allows such a marriage, but now living in a state which does not recognize same-sex marriage, may not be considered married for federal tax purposes. However, the IRS will issue guidance on this, and based upon the Administration’s reaction to the Supreme Court decision, there is a good chance that the IRS will recognize any legally performed same-sex marriage no matter where the couple currently resides.
A married couple is not permitted to file as Single or as Head of Household. The only options are Married Filing Joint or Married Filing Separate. While many couples will find their taxes lower now that they can file as married, others will find their taxes higher, due to the so-called marriage penalty. For 2013 and forward, same-sex married couples will have to file as either Married Filing Joint or Married Filing Separate, even if it would be cheaper to file as Single or Head of Household. This is also true of any couple who has not yet filed for 2012. For earlier years there is technically no requirement to file an amended return, so most people will only file an amended return if it will result in a refund. But if the IRS audits, the IRS could change the filing status and increase the tax.
Moreover, a major area affected by the DOMA decision is retirement plans.
In a situation in which one spouse of a married couple is not working, that person can still contribute to an individual retirement account as long as the working spouse has sufficient income. This option is now open to same-sex couples. However, the deadline for contributing for 2012 and earlier years has passed, so 2013 is the first year for same-sex couples to do this spousal IRA. This ability for non-working same-sex spouses to contribute to IRA accounts could assist in saving for retirement.
Inherited IRAs are another area of major change for same-sex couples. Spouses are the only beneficiaries that are permitted to treat inherited IRAs as their own. This allows them to postpone distributions until their own retirement date, or to take smaller mandatory distributions should they remain as beneficiaries.
Unfortunately, even in the case of same-sex couples, with marriage sometimes comes divorce. The tax law does provide that transfers between spouses or former spouses that are incident to a divorce are nontaxable transactions. This will now apply to divorcing same-sex couples. Also, the tax law provides that a company retirement plan can name the nonparticipant spouse as an alternate payee in case of divorce. In the case of an IRA in divorce, the tax law provides a tax-free transfer of a part of the IRA from the IRA holder to the former spouse.
Federal law mandates that a spouse be the beneficiary of any company plan retirement account such as a section 401(k) account, unless the spouse waives that right. Some states mandate the same for IRAs. Therefore many beneficiary designation forms will need to be changed, or spousal waivers obtained.
In the gift and estate area, the unlimited marital deduction comes into play. The estate tax marital deduction was actually the issue in the Supreme Court case that declared Section 3 of DOMA unconstitutional.
With the unlimited marital deduction on gifts, same-sex couples can now make unlimited transfers between partners. (Note that the unlimited marital deduction for gift taxes and estate taxes only applies if the recipient/surviving spouse is a US citizen.)
Clearly any estate that paid federal estate tax where it has now been determined there would be a marital deduction should amend the federal estate tax return to claim the refund. Actually this should have been done earlier, when the District Court in New York first ruled on this issue.
For gift tax returns, amended returns should be filed to claim the marital deduction even if the Statute of Limitations on the return has passed. This is because the gift tax is cumulative and ultimately could affect the estate tax. It would seem though that if any gift taxes were paid on a return past the Statute of Limitations, the ability to get a refund is in doubt. Further IRS guidance on this would be needed.
The 2010 Tax Act added the concept of portability to the estate tax rules. Portability allows any estate tax credit unused when the first spouse dies to be available upon the death of the survivor. In order for the survivor to get the benefit of portability, the estate of the first deceased spouse must file a timely Federal estate tax return. That return is due nine months from the date of death, with a six month extension available. If one spouse of a same-sex couple died more than nine months ago and did not file a Federal estate tax return, further IRS guidance would be needed to see if they will permit a late filed return for portability purposes. Hopefully, this will be the case.
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