NOTE: SEE BLOG ENTRY regarding consequences of DOMA being declared unconstitutional. FALL OF DOMA
The Supreme Court appears ready to rule on the constitutionality of DOMA with a ruling expected as early as June 2013. A favorable ruling will result in a number of tax and estate planning changes for Registered Domestic Partners and Same Sex Married couples.
Discussed below are some of the issues that you as a same sex couple will need to consider. Every situation is different and what is a positive change for one couple could be negative for another.
Most of the changes involve future actions or results. But there is one area where you may need to go ahead and take action before a decision on DOMA is reached: If you can claim a refund for 2009 income or estate taxes paid, you would need to file the appropriate forms with the IRS by April 15, 2013, to preserve your right to claim that refund (Protective Claim for Refund, see below form more info). Otherwise the statute of limitations would expire and the 2009 refunds would be lost. The important point here is that you can’t wait for DOMA to be decided. You have to go ahead and file the protective claim.
Abbreviations used:
- DOMA - Defense of Marriage Act
- SSM - Same-Sex Married
- RDP - Registered Domestic Partners
Here are some of the more common questions/issues re same sex tax filings if DOMA is overturned:
Click on each topic to read the information
If DOMA falls, how would this most likely effect our taxes?
Without DOMA, SSM (and possibly RDP) couples would have to file married-joint returns (or less often, married-separate). In some cases this will mean a lower overall tax obligation than two people filing as single. This opens up the opportunity not only for tax savings in the future but also amending and receiving refunds for past years.
This is different from the community property filings which started in 2010. Under the community property ruling, same sex couples still filed as single but divide the community income between the two partners.
With a married-joint return, the community property division is no longer relevant as both partners’ income is included on the joint return.
A joint filing (vs 2 single returns using community property) will help some couples and hurt others. It just depends on the situation and how the numbers work out. So far in my practice, I’ve seen about 20% of my clients who would benefit by filing a joint return.
It’s relatively easy to determine whether you would benefit or not: Look at your California pro-forma tax return that was prepared on a joint basis. Then compare the total tax shown on that return to the total of the tax shown on the two single returns. That will give you an idea of what the savings or cost would be. And it may differ from year to year.
Filing two single returns would no longer be an option for same sex married couples assuming DOMA is overturned. So starting with the 2013 tax return, same sex couples would file as “joint” or “married-separate”.
What if you haven’t filed prior year returns? Although less clear, you may also have to file as married for prior years filed after the DOMA decision. So if a joint return is not beneficial for you, be sure to catch up on prior un-filed tax returns while you can still file two single community property returns instead.
This is different from the community property filings which started in 2010. Under the community property ruling, same sex couples still filed as single but divide the community income between the two partners.
With a married-joint return, the community property division is no longer relevant as both partners’ income is included on the joint return.
A joint filing (vs 2 single returns using community property) will help some couples and hurt others. It just depends on the situation and how the numbers work out. So far in my practice, I’ve seen about 20% of my clients who would benefit by filing a joint return.
It’s relatively easy to determine whether you would benefit or not: Look at your California pro-forma tax return that was prepared on a joint basis. Then compare the total tax shown on that return to the total of the tax shown on the two single returns. That will give you an idea of what the savings or cost would be. And it may differ from year to year.
Filing two single returns would no longer be an option for same sex married couples assuming DOMA is overturned. So starting with the 2013 tax return, same sex couples would file as “joint” or “married-separate”.
What if you haven’t filed prior year returns? Although less clear, you may also have to file as married for prior years filed after the DOMA decision. So if a joint return is not beneficial for you, be sure to catch up on prior un-filed tax returns while you can still file two single community property returns instead.
Will the court ruling apply to RDP couples as well as Same Sex Married Couples?
The short answer is we don’t know.
As I’m sure you recall, there were about 17,000 same sex marriages performed in Calif prior to passage of Prop 8 in Nov 2008. Those marriages were allowed by the courts to stand. If DOMA is overturned, these couples would be treated as married for tax purposes.
For RDP couples, the issue is less clear. But there is reason to think the IRS would consider RDP status to be the equivalent of marriage. All bets are off if Congress gets involved.
A 2010 IRS ruling treated an Illinois opposite-sex RDP couple as married for purposes of filing joint return. The rationale was that under Illinois law, the RDP couple had all the rights and privileges of a married couple. Such is also the case for Calif RDPs. So if the IRS applies the same rationale, a Calif RDP couple would be considered married. On the other hand, the ruling in the Illinois case was not issued as a Treasury Department regulation or Revenue Ruling and thus carries relatively little weight.
If the IRS rules RDP couples do not count as married, then what? In my opinion, RDP couples would continue to file as single using the community property rules. And as I mentioned earlier, in many cases two single tax returns are preferable at least from an income tax stand point.
If an RDP couple wants to be treated as married, they could get married in another state where same sex marriage is allowed. Under Calif law, same sex marriages from other states are recognized as valid. Thus a Calif RDP couple, could travel to another state which allows same sex marriage, have the marriage performed in that state (assuming no residency requirement), then return to Calif where the marriage would be treated as valid. As the marriage is valid in Calif, it would also be valid at the Federal level. This strategy may be especially useful for a couple desiring the benefits of marriage for estate tax purposes, i.e., the marital exclusion.
As I’m sure you recall, there were about 17,000 same sex marriages performed in Calif prior to passage of Prop 8 in Nov 2008. Those marriages were allowed by the courts to stand. If DOMA is overturned, these couples would be treated as married for tax purposes.
For RDP couples, the issue is less clear. But there is reason to think the IRS would consider RDP status to be the equivalent of marriage. All bets are off if Congress gets involved.
A 2010 IRS ruling treated an Illinois opposite-sex RDP couple as married for purposes of filing joint return. The rationale was that under Illinois law, the RDP couple had all the rights and privileges of a married couple. Such is also the case for Calif RDPs. So if the IRS applies the same rationale, a Calif RDP couple would be considered married. On the other hand, the ruling in the Illinois case was not issued as a Treasury Department regulation or Revenue Ruling and thus carries relatively little weight.
If the IRS rules RDP couples do not count as married, then what? In my opinion, RDP couples would continue to file as single using the community property rules. And as I mentioned earlier, in many cases two single tax returns are preferable at least from an income tax stand point.
If an RDP couple wants to be treated as married, they could get married in another state where same sex marriage is allowed. Under Calif law, same sex marriages from other states are recognized as valid. Thus a Calif RDP couple, could travel to another state which allows same sex marriage, have the marriage performed in that state (assuming no residency requirement), then return to Calif where the marriage would be treated as valid. As the marriage is valid in Calif, it would also be valid at the Federal level. This strategy may be especially useful for a couple desiring the benefits of marriage for estate tax purposes, i.e., the marital exclusion.
If beneficial, can prior years be amended to married joint status?
Yes, provided the statute of limitations is still open (generally 3 years from filing). As of now, 2009, 2010 and 2011 could be amended.
If 2012 returns are filed before the DOMA decision is issued, that year could also be amended if beneficial. If your 2012 return is filed after DOMA is overturned, it is likely this will have to be prepared as married joint. So if it is more beneficial to file 2 single returns, don’t get an extension and file as soon as possible.
The immediate decision facing a same sex couple (mentioned previously ) concerns 2009 taxes.
Here’s the issue:
Obviously this takes some thought.
If there are issues with your 2009 return, you may prefer to do nothing and let the statute expire.
If 2012 returns are filed before the DOMA decision is issued, that year could also be amended if beneficial. If your 2012 return is filed after DOMA is overturned, it is likely this will have to be prepared as married joint. So if it is more beneficial to file 2 single returns, don’t get an extension and file as soon as possible.
The immediate decision facing a same sex couple (mentioned previously ) concerns 2009 taxes.
Here’s the issue:
- 2009 returns will be open for amendment until April 15, 2013 (three years from the tax due date).
- The problem is the court is not expected to rule until June 2013 when it will be too late to amend.
- The solution is to file a Protective Claim for Refund for 2009 prior to April 15, 2013.
- The result is to keep the statute of limitations for 2009 open until the DOMA case is resolved.
Obviously this takes some thought.
If there are issues with your 2009 return, you may prefer to do nothing and let the statute expire.
What happens with “other state” tax returns?
A Calif same sex couple would have to file in another state if they have income (such as rent, royalties, or business income) earned in that state.
Many other states follow the Federal filing status (married-joint, married-separate, etc).
If, after DOMA, a same sex couple files as joint for Federal, they most often would file as joint in the other state even if the other state does not recognize same sex marriage. This does not mean however that the other state will not change its laws to prevent such filings in the future (in order to prevent same-sex couples from filing joint returns).
Below we discuss a few other areas to consider.
Many other states follow the Federal filing status (married-joint, married-separate, etc).
If, after DOMA, a same sex couple files as joint for Federal, they most often would file as joint in the other state even if the other state does not recognize same sex marriage. This does not mean however that the other state will not change its laws to prevent such filings in the future (in order to prevent same-sex couples from filing joint returns).
Below we discuss a few other areas to consider.
Social Security
Without DOMA, same sex couples could claim spousal social security benefits.
For example:
For example:
- The older spouse could start claiming full social security benefits at age 66 currently.
- The younger spouse could claim a 50% spousal benefit assuming they are age 62.
- The the younger person might want to wait until age 70 to claim his/her social security when the benefit would be higher
Estate Tax
Without DOMA, same sex couples who are subject to the estate tax (presently $5 million in net worth although subject to change this year) would be able to claim the marital exclusion.
This would be a huge benefit to those affected as estate tax could be avoided entirely upon death of the first partner.
This would be a huge benefit to those affected as estate tax could be avoided entirely upon death of the first partner.
Inherited IRAs
Under present law, an IRA inherited by a partner is treated as passed to an unrelated person.
This means the surviving partner would have to start paying taxes based on the minimum distribution rules.
As a spouse, the inherited IRA funds could be combined with the spouses funds and taxes delayed until the survivor is required to take minimum distributions.
This means the surviving partner would have to start paying taxes based on the minimum distribution rules.
As a spouse, the inherited IRA funds could be combined with the spouses funds and taxes delayed until the survivor is required to take minimum distributions.
Property Transfers at Divorce
Under current Federal law if a same sex couple divorces, the property settlement may be treated as a taxable sale or gift.
As spouses, property transferred as a result of divorce is not taxable.
As spouses, property transferred as a result of divorce is not taxable.
Employer Medical Coverage
If DOMA is repealed, employer-provided medical insurance to an RDP/Same Sex Partner would no longer be taxable.
If fact you could go back up to 3 years an amend for taxes previously paid (within the time allowed by the statute of limitations for 3 years).
If fact you could go back up to 3 years an amend for taxes previously paid (within the time allowed by the statute of limitations for 3 years).
Alimony
Without DOMA, alimony paid to an ex-RDP/spouse can be tax deductible for the paying spouse and taxable to the recipient subject to the same rules applicable to opposite sex couples.
Pensions
Joint and survivor benefit options under employer qualified plans would be open to a same sex couple.
If you have already retired and wish to change from a single to a joint-survivor benefit, contact your plan administrator as soon as possible to find out what the requirements and time limits are.
If you have already retired and wish to change from a single to a joint-survivor benefit, contact your plan administrator as soon as possible to find out what the requirements and time limits are.
Spousal IRA Contributions
Under DOMA the earnings of your partner/spouse do not count for IRA contribution purposes.
Without DOMA even if you don’t work you may be able to contribute to an IRA account in your own name based on your partner’s earnings.
Without DOMA even if you don’t work you may be able to contribute to an IRA account in your own name based on your partner’s earnings.
Conclusion
I have discussed above a few of ways that a favorable DOMA decision may effect you. It is based on my opinion and obviously depends on the details of any court rulings and subsequent legislative and regulatory actions both at the Federal and state levels.
The important thing now is to contemplate any potential changes that may be coming your way and how they relate to your specific situation.
Feel free to contact me with questions or comments.
I prepare a lot of tax returns for same sex couples and also offer a free initial consultation.
The important thing now is to contemplate any potential changes that may be coming your way and how they relate to your specific situation.
- If you are in a long term relationship but not married/RDP, should you be?
- Do you need to make estate planning changes?
- Should you alter your retirement plans?
- Should you file a Protective Claim for Refund for 2009 taxes?
Feel free to contact me with questions or comments.
I prepare a lot of tax returns for same sex couples and also offer a free initial consultation.