DOMA’s Demise and Federal Taxes

By :: June 26th, 2013

Same-sex couples are cheering the Supreme Court’s striking down the Defense of Marriage Act (DOMA), but the tax consequences are more of a mixed bag. For many couples, federal recognition of same-sex marriages will mean lower tax bills, but some gay couples will end up paying more.

As I discussed here a few months back, DOMA’s mandate that the federal government not recognize same-sex marriages denied same-sex couples both the tax savings and higher tax bills that marriage can bring. Today’s Supreme Court decision reverses that, exposing gay couples to both marriage bonuses and penalties. Of course, that applies only to same-sex couples married in states that allow them to marry. (It’s unclear how the ruling affects same-sex couples married outside the United States.)

Estate taxes were the issue that motivated the DOMA case. Edith Windsor sued the federal government because her wife’s estate had to pay more than $363,000 in estate taxes. The estate would have paid nothing if the federal government recognized her marriage.

The estate tax provides only marriage bonuses. An estate may claim an unlimited spousal exemption for inherited assets—and thus pay no tax—while the total exemption for all other heirs is limited, currently to $5.25 million. And any unused part of that limited exemption carries over to the estate of the surviving spouse, thus guaranteeing that $10.5 million of the couple’s combined assets will go to heirs estate tax-free. DOMA’s demise can thus result in lower estate taxes for same-sex couples, although very few will be affected: less than 0.2 percent of decedents leave estates big enough to owe tax.

The outcome is not always so good regarding federal income taxes: many same-sex couples will find that federal recognition of their marriages means higher income tax bills. Legislation enacted in 2001 and 2003 protects most middle-income households from marriage penalties (and increased the size of marriage bonuses), but low- and high-income couples can incur substantial marriage penalties, most often when both spouses have similar incomes.

DOMA protected same-sex couples from that outcome by requiring them to file as individuals. In contrast, couples in which spouses have very different incomes will likely receive marriage bonuses—lower income tax bills than they would pay as individuals.

There’s even more good tax news for same-sex couples with marriage bonuses: they can file amended tax returns as married couples for the last three tax years and collect the marriage bonuses DOMA denied them.

There’s even a sliver of good news for same-sex couples incurring marriage penalties. They probably won’t have to amend their recent tax returns and pay the additional income tax they would owe if they had filed as married couples.

7Comments

  1. Ralph H  ::  5:16 pm on June 26th, 2013:

    Looks like a good ruling, but opens up several cans of worms. For instance if you married in NJ but move to PA what is your status? Also if Civil Unions are law (NJ) should you not get same status. Also as mentioned Gay Couples with roughly equal pay will get hosed just like my wife and I have. Also, do they HAVE to declare on tax form?

    Hope smart fair people get implementation right.

  2. What Will Supreme Court Decision on DOMA Mean for the IRS? – Forbes  ::  5:54 pm on June 26th, 2013:

    […] rather than as singles or heads of household. My Tax Policy Center colleague Bob Williams has pointed out that while the tiny fraction of couples with wealth high enough to be affected by the estate […]

  3. Michael Bindner  ::  8:26 pm on June 26th, 2013:

    One good lawsuit challenging anti-marriage amendments will nationalize gay marriage and apply this to all states. I suspect they are plaintiff shopping now. While Virginia is a tasty morsel its ban on gay marriage is so draconian that it can be overcome without granting universal marriage rights. Still, it should have been challenged a decade ago. Blame a lack of confidence by the legal community representing gays for that one – as I suspect they enjoyed benefiting from an unsolvable problem. Now that the Court is clear on this issue, Lambda and the HRC will be working itself out of a job rather soon.

  4. Tax Roundup, 6/27/2013: All apologies edition. And DOMA madness! « Roth & Company, P.C  ::  9:22 am on June 27th, 2013:

    […] Roberton Williams, DOMA’s Demise and Federal Taxes (TaxVox) […]

  5. ND  ::  11:39 am on June 27th, 2013:

    Isn’t it actually more complicated than this? In any married couple, whether hetero or same sex, particularly when there is a big disparity in incomes between the partners, the higher earning partner gets the so-called “marriage bonus” (if one is even available) and the lower earning partner gets a “marriage tax rate increase” into a higher bracket.

    The “marriage bonuses” are actually a form of subsidy to (a) sole breadwinner marriages (or marriages with a big disparity in income, which usually correlates to the higher earner taking no responsibility for child care and other unpaid work, whether s/he does it him/herself or outsources it), and (b) to sole breadwinners within those marriages, at the expense of the nonearning or lower earning spouse in terms of taxes, but more seriously, when children are involved, at the expense of their having two parents who take responsibility for their full range of needs.

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