This is an update to our recent firm Estates Advisory “Estate Planning Opportunities for Same-Sex Couples After DOMA.” The IRS has released guidance clarifying the federal tax implications of the U.S. Supreme Court decision in United States v. Windsor and resolving the question of what constitutes lawful marriage that arose after the Windsor decision. In Rev. Rul. 2013-17, the IRS ruled that same-sex couples legally married in any domestic or foreign jurisdiction will be treated as married for federal tax purposes, regardless of their state of domicile. Said a different way, the IRS ruled that individuals of the same sex will be considered lawfully married as long as they were married in a state whose laws recognize the marriage of same-sex individuals (i.e., “state of celebration”), even if such individuals reside in a state that does not recognize the validity of same-sex marriages.
United States v. Windsor
The Defense of Marriage Act (i.e., DOMA) was enacted in 1996, and Section 3 of DOMA defined marriage for federal law purposes to mean only “a legal union between one man and one woman as husband and wife.” Section 3 disallowed federal recognition of a same-sex marriage that was valid under state law. In Windsor, the surviving spouse of a same-sex couple filed a lawsuit for a refund of the federal estate taxes paid by the deceased spouse’s estate and argued that the deceased spouse’s estate should be able to use the unlimited marital deduction reducing such estate’s federal estate tax liability to zero. The court held that Section 3 of DOMA was unconstitutional and violated the equal protection clause guaranteed by the Fifth Amendment. As a result, same-sex married couples currently residing in a jurisdiction that permits and recognizes marriages between same-sex couples are treated the same as opposite-sex married couples for federal law purposes. However, the court did not decide whether federal marital rights are available to same-sex spouses who reside in a state that does not recognize same-sex marriage.
Revenue Ruling 2013-17
Effective Sept. 16, 2013, Rev. Rul. 2013-17 now makes it clear that for federal tax purposes the terms “spouse,” “husband” and “wife” include a person of the same sex as long as the couple was legally married in a state that recognizes same-sex marriages[1] even if they reside in a state that does not—hence, the “state of celebration” rule. Rev. Rul. 2013-17 clarifies that same-sex couples legally married in any foreign or domestic jurisdiction are considered married for federal tax purposes regardless of the couple’s state of domicile.
In announcing the “state of celebration rule,” Treasury Secretary Jacob L. Lew stated that “[t]oday’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve. This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”
The IRS also made clear who is not legally married. Couples (whether opposite-sex or same-sex) in registered domestic partnerships or civil unions are not considered married for federal tax purposes.
How Does Rev. Rul. 2013-17 Affect Same-Sex Couples?
For all federal tax purposes, including income, estate and gift taxes, same-sex couples who are legally married are treated as married. The federal tax law benefits of this ruling include, but are not limited to, filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, using the unlimited marital deduction, and splitting gifts.
The IRS provided guidance to Rev. Rul. 2013-17 soon after the ruling was issued. Below are some key points from the published IRS guidance to Rev. Rul. 2013-17:
- A married same-sex couple may file a joint federal income tax return if they were married in a state that recognizes same-sex marriage but they live in a state that does not recognize same-sex marriage.
- For tax year 2013 and forward, same-sex spouses must file federal income tax returns using a married filing jointly or married filing separately status.
- For tax year 2012 and all prior years, same-sex spouses who file an original federal income tax return on or after Sept. 16, 2013, generally must file using a married filing separately or married filing jointly status.
- For tax year 2012, same-sex spouses who filed their federal income tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal income tax returns to file using married filing separately or married filing jointly filing status.
- For tax year 2011 and earlier, same-sex spouses who filed their federal income tax returns timely may choose (but are not required) to amend their federal income tax returns to file using married filing separately or married filing jointly filing status, provided the period of limitations for amending the return has not expired. This allows same-sex couples to adopt the most tax advantageous status of being treated as either married or single.
- Same-sex married couples living in a nonrecognition state will continue to file state income tax returns as single even though they are considered married for federal tax purposes.
- The amounts paid for employer-provided health care coverage by an employee for a same-sex spouse could be treated as pretax dollars and, therefore, excluded from income. As a result, for the years that the period of limitations has not ended, the employee can file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse.
- For federal estate, gift, and generation-skipping transfer tax purposes, tax returns should be examined and potentially amended to incorporate the unlimited marital deduction for a same-sex married couple.
- Same-sex married couples who divorced and paid income tax due to a settlement agreement should review their prior income tax returns.
A Word To The Wise
The clarity provided by Rev. Rule 2013-17 makes this an opportune time for individuals in same-sex relationships to consider financial and estate planning opportunities.
[1] Currently, there are 15 states that permit and recognize marriage between same-sex spouses: California, Connecticut, Delaware, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Washington. The District of Columbia also permits and recognizes same-sex marriages.
Published January 24, 2014.
