What Will Supreme Court Decision on DOMA Mean for the IRS?
By Len Burman :: June 26th, 2013
I’m celebrating today’s Supreme Court ruling on the Defense of Marriage Act (DOMA) with my friends and relatives whose marriages are today, finally, accorded equal status to mine.
But I am a tax geek and couldn’t help but think about the consequences of a hundred thousand or so married couples who will now file joint returns 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 tax will be unambiguously better off, the income tax is more of a mixed bag. Gay couples will now get to experience the joys and agonies of marriage bonuses and penalties.
But for about 75,000 married same-sex couples, the Supreme Court’s ruling could come with a very nice (though belated) wedding gift: Nearly $200 million in refunds.
As Bob and others have pointed out, today’s ruling means that many newly recognized couples will now be able to file amended returns to claim the marriage bonuses they might have enjoyed for the past three years were it not for DOMA. .
We can’t know exactly how many couples will benefit and by how much because there is currently no way to identify legally married same sex couples on individual income tax returns.
However, making some heroic assumptions, one can come up with a very rough ballpark estimate.
Josh Keller of the New York Times estimated that “At least 82,500 gay couples have married since Massachusetts became the first state to legalize gay marriage in 2004 [through 2012].” This total probably reflects some under-reporting. It also doesn’t include the second half of 2012 in New York and doesn’t include those legally married outside the United States like Edith Windsor, the woman who challenged DOMA.
Let’s assume that 100,000 additional couples would have legally filed as married in 2012 were it not for DOMA. A question is how many of them would have received marriage bonuses—i.e., paid lower taxes.
Let’s assume that half of the newly recognized couples receive bonuses, which means that roughly 50,000 couples might benefit from filing amended income tax returns for 2012, 2011, and/or 2010. If all 50,000 filed amended returns for an average of 1.5 years out of the three this would yield 75,000 amended returns.
The IRS is doubtless unenthusiastic about adding to their workload at a time when they are suffering the effects of the sequester and budget cuts, but this number is relatively small compared with the total number of amended returns (Form 1040X) that the IRS processes every year. The IRS projects 5.5 million amended income tax returns in 2013, so 75,000 additional returns would represent only a 1.4% increase. If some couples choose not to amend their returns, the IRS’s workload will be even more manageable.
To estimate total income tax refunds these new filers will claim, assume that the average bonus is $2,500, which is slightly less than the bonus a couple with $50,000 of income and one earner would receive in 2012 according to the Tax Policy Center’s nifty Marriage Bonus and Penalty Calculator. This would yield total refunds of $187 million. That sounds like a lot of money, but it amounts to rounding error compared with projected income tax receipts of $1.3 trillion.
Of course, this is just the tip of the iceberg. My cousin Andrew points out that he will no longer have to pay tax on his husband’s health insurance. The IRS allows a tax-exempt health insurance plan to cover a federally recognized spouse and qualifying children, but not a same-sex partner. Andrew's employer may choose to pay all or part of the cost of his husband's coverage, but the employer's contribution was until today considered taxable income. Now, Andrew’s family plan can cover his spouse Tom.
And the DOMA ruling will affect much more than taxes. The GAO estimated in 2004 that 1,138 federal statutory provisions treat married couples differently from singles. Social Security, for example, can provide very large marriage bonuses.
There’s a bigger question about how today’s ruling affects federal outlays and receipts. Bob talks about this a little about the tax consequences here. The short version is “it’s complicated.”
We will have more to say about this when we have actual data.
Meanwhile, back to the celebration already in progress.