On June 26, 2013 the Supreme Court held in United States v. Windsor that Section 3 of the federal Defense of Marriage Act (“DOMA”) is unconstitutional. As a result the federal government will now recognize marriages between same sex couples that are valid under state law. Section 3 of DOMA provided that only persons of the opposite sex could be recognized as “spouses” and “married” for purposes of federal law. Section 2 of DOMA, which allows states not to recognize same-sex marriages performed in other states, was not addressed by the Supreme Court. The question remains open what happens when a couple lawfully married in one state moves to or resides in another state that does not recognize the marriage. Currently, 13 states and the District of Columbia permit same-sex marriages.
The Supreme Court’s decision will impact over one thousand federal tax and nontax statutes and it is not clear exactly how each agency charged with administering these statutes will react. The issues range from the common (employer health care benefits and jointly filed returns, both discussed below) to the more technical (with eligibility for spousal IRA contributions and related party status of separately owned businesses, and impact to estate & gift planning as three examples).
On June 27, the Internal Revenue Service issued a statement that the agency “will be working with the Department of Treasury and Department of Justice, and … will move swiftly to provide revised guidance in the near future.” In the intervening weeks, no further guidance has been issued, resulting in ongoing confusion to all affected parties.
Pending guidance from the IRS and other federal agencies, taxpayers should pay close attention to the following issues:
Imputed Income for Employer Health Care Benefits
Prior to Windsor, if an employer offered health insurance coverage to employees with domestic partners, the employer was required to impute income to those employees based on the fair market value of the additional benefits provided to the domestic partner. Now that same sex married couples are treated equally under the tax code, employer subsidies of health insurance for those same sex spouses and for dependent coverage can be tax-free. Employers should cease imputing income for these types of benefits as soon as administratively possible.
The IRS generally follows the laws of the state of residency for tax purposes. As such, employers that have same-sex married employees living in states that do not recognize the couples’ marriage should continue to impute the income until such time is guidance as received from the IRS as to whether the marriage will be recognized for tax purposes.
Additionally, employers may be eligible to file for a refund for the employee share of FICA taxes previously paid. However, employers should await guidance from the IRS on how to claim such refunds.
Because the ruling deems Section 3 of DOMA unconstitutional, it is as if the law never existed. Same-sex couples should be entitled to take advantage of retroactive benefits. Therefore, same-sex couples are now eligible to amend their income tax returns for 2010, 2011, 2012 and possibly 2009 if the Statute of Limitations is still open.
It is possible that the IRS could require same-sex couples to amend their returns to be filed on a married basis (joint or separate). Filing a married filing jointly federal income tax return could reduce a couple’s income tax liability; however, it could also increase it. It will depend on each couple’s particular income tax circumstances. Couples who believe they may be eligible for a refund should consult with their tax advisor in light of the Statute of Limitations for amending previously filed returns.
Individuals, businesses, and other employers alike will be significantly affected by the Supreme Court ruling.