“DOMA is dead,” chanted people outside of the Supreme Court when they received word that the court had struck down the Defense of Marriage Act. The landmark ruling paves the way for same-sex couples to receive the same federal benefits as opposite-sex unions.
The prospect of taking advantage of the more than 1,100 federal benefits that opposite sex couples have enjoyed may be a win for same-sex couples, but along with the ruling came plenty of confusion that the IRS, as well as federal and state lawmakers will have to sort out.
Benefits available to same-sex couples include:
1. Ability to file joint tax returns
A couple legally married in one of the 12 states that sanction same-sex unions would be permitted to file a joint tax return. That doesn’t necessarily mean that the couple will see a tax break. According to accountants, it largely depends on the income level of each individual.
2. Favorable estate tax provisions
Legally married same-sex couples can now leave their spouse an unlimited amount of money without having to pay estate taxes. Under current law, they can leave each other up to $5.25 million without paying federal estate taxes. Although most will not have that amount of money as part of their estate, they will now be able to hand over all of their estate regardless of its size, without paying up to 40% in estate taxes.
This also allows same-sex couples to lower the amount of life insurance they held to pay those estate taxes.
3. Social Security benefits
Married opposite-sex spouses have a Social Security advantage that same-sex couples did not. When one spouse passed away, the other could switch to the deceased spouse’s benefits if those benefits were higher. Another provision allowed one spouse to take benefits early and later switch to spousal benefits. Both of these strategies are now available to same-sex married couples.
4. Insurance benefits
A person in a same-sex marriage is currently taxed on the money paid by his or her employer for the spouse’s health insurance benefits. Under new laws, that tax will end and businesses, who have long complained of the burdens associated with complying with laws concerning same-sex couples, will see a reprieve.
However, nothing will change relating to eligibility. Robert Hartwig, an economist and president of the Insurance Information Institute, said,
“Sexual orientation is not an underwriting factor and insurers have, for many, many years, issued policies to couples that are same-sex, opposite-sex, to people that are roommates, to intergenerational relationships and this will continue.”
5. Immigration laws
If a U.S. citizen married somebody of the same sex who was from a different country, that spouse would not be able to live legally in the United States as they would if the couple were heterosexual. That will no longer be the case.
Challenges Still Loom
As the dust settles, experts are warning that the ruling won’t come without complications. Numerous questions, many without a straightforward or “politics-free” answer, loom for state and federal lawmakers.
First, are all of these changes retroactive? When are they officially in effect and when can same-sex couples begin applying for relief? Most agree that since taxpayers can amend their returns for the past three years, they will receive refunds for that time period but nobody knows if they can amend returns prior to that. Others ask if the federal government will have to pay interest and penalties on the refunded money or just interest.
Second, how will the IRS deal with differing state laws? Only 12 states allow same-sex marriages but what about couples who were wed in a state that allows it but now live in a state that does not? What if a couple travels to another state in order to get married but makes their permanent residence in a state where gay marriage is not permitted?
The IRS will likely begin releasing a flurry of regulations that interpret current law. Those regulations are likely to be complicated, requiring the help of a tax professional - many of whom will need a significant amount of time to sort out the implications.
Simply put, same-sex couples who have a financial plan in place will have to rewrite that plan in its entirety to cover their new rights because of the Supreme Court ruling, but that - according to advocates - is a good problem to have.
The Bottom Line
The recent Supreme Court ruling paved the way for same-sex couples to enjoy the same federal benefits as opposite-sex couples, but with the opposition vowing to fight the recent ruling through the legislative branch, the changes aren’t likely to happen quickly.
The IRS is charged with reinterpreting more than 1,000 regulations. Then, it will issue publications for tax professionals. Same-sex couples are advised to seek the help of a tax professional who will keep abreast of the new guidelines as they are released.