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Life After DOMA: Estate Tax

I talk a lot on this blog about the income tax implications to same-sex married couples of the Defense of Marriage Act being struck down.

But like a lot of folks, I tend to gloss over the estate tax implications because estate tax seems to affect so few people.

Still, it’s important to reflect on the estate tax as it relates to same-sex married couples in this post-DOMA world.

What is Estate Tax?

When a person dies, their estate may be subject to estate tax if the value of the things they own (cash in the bank, the value of their property, etc.) totals more than the estate tax exemption amount. For 2014, the exemption amount is $5.34 million.

Estates with a value above $5.34 million are subject to estate tax.

There’s an exception for married couples, referred to as the “unlimited marital exemption.” If the estate passes to a surviving spouse, no estate tax is owed, regardless of the value of the estate.

Implications for Same-Sex Married Couples

When DOMA existed, the unlimited marital exemption didn’t apply because the federal government didn’t recognize same-sex marriage.

So for couples whose estate was large enough, estate tax was a big problem.

Often Glossed Over

I’m as guilty as anyone of glossing over the estate tax. I can’t fathom having $50,000 of assets, let alone $5 million. The vast majority of people will never need to worry about the estate tax.

But it’s a mistake to completely ignore estate tax, especially when we talk about the post-DOMA landscape. Because if estate tax does apply to someone, it’s a big tax hit.

It’s also important to talk about estate tax within the context of DOMA because the DOMA case — Windsor v. United States — was an estate tax case.

“Windsor” is Edie Windsor. Her spouse died in 2009 and had an estate large enough to be subject to estate tax. The estate passed to Edie, but because of DOMA, the marital exemption didn’t apply. Edie Windsor paid $363,000 of estate tax and then sued to get it back. That led to the historic Supreme Court case that struck down DOMA last June.

Life After DOMA: Gift Tax

When we talk about taxes in light of the U.S. Supreme Court striking down the Defense of Marriage Act, the conversation is always around income taxes, and sometimes FICA taxes.

But there are two other types of taxes out there affected by the DOMA ruling: gift tax and estate tax.

Gift Tax

I find that most people have never heard of gift tax. Here’s what it is:

Tax law says you can give up to $14,000 of gifts to any one person during the year. If you give more than $14,000 of gifts to one person, you must file a gift tax return and either use part of your “lifetime credit” or pay the gift tax. (A further discussion beyond this is above the scope of this blog post.)

Note that gift tax is paid by the giver, not by the person who received the gift.

Spousal Exception

No gift tax is owed on gifts given to spouses. You can give an unlimited amount of gifts to your spouse without any worries about gift tax.

For couples in same-gender marriages, gift tax could have been a problem before DOMA was struck down, because DOMA prohibited the federal government from recognizing same-gender marriages.

What is a Gift?

It’s not just something you wrap up with a bow and put under the Christmas tree for someone at Christmastime.

With gift tax, we’re often talking about property transfers.

Example 1:

Alex and Ethel are married. Alex owns a house worth $100,000. For purposes of this example, let’s assume that there’s no mortgage on the property. Alex puts Ethel’s name on the title to the property. Under tax law, Alex is considered to have made a $50,000 gift to Ethel. But because spouses can give unlimited amounts of gifts to each other, gift tax doesn’t apply.

Example 2:

Same as Example 1, except Alex and Ethel aren’t married. In this case, Alex is considered to have made a $50,000 gift to Ethel, and Alex would need to file a gift tax return and either use part of his lifetime credit or pay gift tax on the transfer. 

When DOMA existed, Example 2 applied to same-sex married couples. Now that DOMA is gone, same-sex married couples fall under Example 1.

I Was On WHO-TV Last Night, Talking About Same-Gender Marriage

I took part in an interview yesterday with WHO-TV where one of my clients was also interviewed. My client is in a same-gender marriage, and the topic was how this is the first year same-gender couples can file federal taxes as married.

Here’s a link to the WHO website where you can read their article and view the video.

But Seriously — How Do Taxes Work If You’re Married to More than One Person?

ID-100207232A few weeks ago I wrote about a ruling by the North Dakota Attorney General that makes it possible for someone to be married to more than one person in two different states.

To recap, the Attorney General’s ruling said:

  1. If someone enters into a same-sex marriage in a state where it’s legal, and
  2. Then separates from their same-sex spouse but doesn’t get a divorce, and then
  3. Moves to North Dakota and wants to enter into an opposite-sex marriage …
  4. This is legal to do in North Dakota because North Dakota’s constitution and state laws prohibit same-sex marriage. So it’s as if the same-sex marriage never happened, and the person can enter into the “new” marriage in North Dakota with no issues.

Or at least, no issues in North Dakota.

This is a real scenario because the AG’s guidance was in response to a specific question from a county recorder.

How would taxes work under this scenario?

I have researched but found no formal guidance, so this is just my opinion:

  1. Under federal tax law, the original same-sex marriage would still be valid because the person never got a divorce, so …
  2. I think this person would need to file their federal taxes as married with their “original” same-sex spouse. (If kids are involved, they might be able to file as head of household under the special rules relating to head of household in cases of married but separated people. At any rate, the original marriage is still valid for federal tax purposes.) But …
  3. North Dakota doesn’t recognize that “original” marriage and now the person is in a “new” marriage in North Dakota, so the person would file a North Dakota tax return as married with their “new” spouse.
  4. If the person has filing obligations in more than one state, it could get even messier.

This obviously is a rare circumstance, but the point is: because of the hodgepodge of laws relating to same-sex marriage, scenarios like this can — and probably will — happen.

Image courtesy of Stuart Miles /

Will Same-Sex Married Couples Pay More or Less in Taxes Now?

The most-common question people in same-sex marriages have about life after DOMA is if they’ll be better off or worse off by filing as married.

I answer by saying that the answer is: “yes, no, maybe.”

In my practice, approximately 2/3 of my clients in same-gender marriages will owe more in taxes by filing as married than they did by filing as two unmarried people.

This is because of something called the “marriage penalty.”

The marriage penalty is not a literal “penalty” assessed against married couples. The term is used informally to explain the phenomenon in the tax brackets whereby two people pay more in taxes when they get married. This has existed since the late 1960s and historically has hit approximately 50% of married couples.

I wrote more about this topic in this blog post from June 2012.

As I wrote in that blog post regarding how same-sex married couples often benefit on their tax returns from filing as two single people:

In presenting the numbers above, I am not saying that same-sex married couples “have it good” on their taxes. THEY DON’T.

As I have said repeatedly, it’s much better to look at the blatant discrimination that same-sex couples face, rather than looking at numbers on a 1040.

In general, the couples who will benefit from filing as married are those where one spouse earns significantly more than the other spouse; but that’s not always the case — if, for example, the lower-income spouse could claim the earned income credit by filing as single, this couple may find that their combined income is too high to claim the EIC, which could cost them at tax time. Again, it varies widely from couple-to-couple.

Year-to-year on a person’s 1040, the “benefit” of being married may be hard to find for some couples. But there’s much more to why it’s good that DOMA got struck down than just the bottom line on the tax return.

North Dakota Taxes, Same-Sex Marriage, And a Really Bizarre Twist

The North Dakota Attorney General issued an “advisory opinion” on Thursday that, while not specifically addressing taxes, makes it clear that North Dakota will not under any circumstances recognize a same-sex marriage. There’s a twist to the story, which I’ll address after a bit.

But first, the basic tax perspective for a typical same-sex married couple who needs to file a North Dakota tax return: they’ll need to file that return as two single people.

From the opinion:

(S)tate law explicitly does not recognize any marriage other than one between one man and one woman, nor does it recognize any rights associated with the union. While the marriage may be valid elsewhere, the North Dakota Constitution and statutes prohibit its legal recognition.

Now for the bizarre twist part.

The advisory opinion was in response to a question posed by a county recorder who asked: if  a person enters into a same-sex marriage in a state that recognizes such a union, is separated from their same-sex spouse but never gets a divorce, and then comes to North Dakota to enter into an OPPOSITE-SEX marriage, would that be okay?

(Yes, according to this article, this apparently is a real scenario.)

According to the Attorney General, the person would be allowed to enter into the opposite-sex union in North Dakota — even though they’re still in a same-sex marriage from another state — because that same-sex marriage isn’t valid and thus never existed under North Dakota law.

I have to admit, I’ve never considered such a scenario. And now I’m digging into the federal tax consequences of this.

Since you typically can’t get married if you’re already married to someone else, I haven’t had any luck finding IRS guidance because I’m not sure this has ever happened before.

My initial reaction is: could it be that the person in this scenario would need to file their federal taxes as married with their same-sex spouse, but then file their North Dakota taxes as married with their “new” opposite-sex North Dakota spouse?

My head hurts!

Colorado Tax Guidance for Same-Sex Marriage

Same-sex married couples who need to file a Colorado tax return can file those returns as married. You can find further guidance from the Colorado Department of Revenue here.

The short version of the guidance is:

  1. Same-sex married couples are required to file federal taxes as married, and
  2. Colorado tax law requires taxpayers to use the same filing status on the Colorado return as they used on the federal return, but
  3. Colorado has a constitutional amendment prohibiting the recognition of same-sex marriage. However….
  4. For tax purposes, couples in same-sex marriages who need to file a Colorado tax return can file that Colorado return as married.


Same-Sex Marriage, IRAs and After-Tax Basis

This is another installment of my “Life After DOMA” series on the tax aftermath of the US Supreme Court’s ruling that struck down the Defense of Marriage Act.

Today I want to blog about individual retirement accounts and after-tax basis.

This is another area where the tax implications are clear for 2013 and future years but not-so-clear in prior years.

What is After-Tax Basis in an IRA?

Deposits made into an IRA are typically deductible, up to certain dollar limits each year (for 2013, the limit is $5,500 if you’re under age 50, or $6,500 if you’re over age 50).

But deposits into an IRA are not deductible if your income is above certain levels. It also depends on if you’re covered by an employer-provided retirement plan. I won’t get into all the details in this post. This page on the IRS website contains more details.

If you put money into an IRA and those deposits end up not being deductible, you have after-tax basis in your IRA.

How Does This Affect Same-Sex Married Couples?

The income levels where IRA deposits become non-deductible vary depending on marital status.

Remember that, prior to 2013, couples in same-sex marriages were prohibited from filing their federal taxes as married, but were required to file their state taxes as a married couple.

So a person in a same-sex marriage who made deposits into an IRA would have needed to apply two different sets of law, and potentially track two different sets of basis (one for federal purposes and one for state purposes).

But That Was Old Law — What Happens Now That DOMA is Dead?

It’s clear that for 2013 and going forward, couples in same-sex marriage will only need to apply “married person” rules to IRAs (and to everything else relating to their taxes).

What’s less clear is what happens with differences between federal and state basis for prior years.

Here’s what I think:

  1. If the person decides to amend prior-year returns, their basis would be adjusted.
  2. If the person chooses not to amend, then the discrepancies in basis from those prior years would remain

For couples facing this situation, the answer to the question of “should they amend to fix the difference in basis?” is “it depends.” They would need to look at their total tax picture

Life After DOMA: What if You Amend One Year But Not the Next?

Something else that’s been playing on my mind about the DOMA ruling: since amending prior years (2010-2012) to file as married is optional for same-sex married couples, what happens if the couple has carryback or carryforwards that affect multiple years, but they don’t want to amend all affected years?

For example, say it’s beneficial for the couple to amend 2010 but not 2011 or 2012. There’s nothing that requires the couple to also amend 2011 or 2012. But what if 2010 contains a re-adjusted loss or basis calculation (NOL, suspended passive-activity losses, etc.) that carries forward to future years? Not amending 2011 or 2012 means those years are now wrong because the adjustments from 2010 aren’t accounted for. And that creates a trainwreck into 2013.

I feel like I should know the answer to this, but honestly, I don’t. So I’m opening up the floor to other tax pros out there for their perspective.

It seems to me that, even if the couple in our example here chooses not to amend 2011 or 2012, they would need to track any necessary adjustments for those years (based on the 2010 amendment) and use those adjustments to prepare their 2013 return. But I’m not sure that doing it that way is really kosher compared to actually amending 2011 and 2012. And some of it would depend on what, exactly, is being carried forward from year-to-year.

Missouri Guidance on Same-Sex Marriage

Missouri has a constitutional amendment banning same-sex marriage, but unlike other states with similar amendments, it appears that couples in same-sex marriages who need to file a Missouri tax return can file those returns as married.

Missouri’s tax laws say that taxpayers must use the same filing status on their Missouri return as they use on their federal return. This puts the tax law in conflict with the constitution when it comes to same-sex married couples. (Remember, a same-sex married couple can file their federal taxes as married — regardless of the state they live in.)

Other states with similar conflicts between tax law and the state constitution have said couples in same-sex marriages CANNOT file state taxes as married because the constitution trumps the tax law. See Nebraska, for example.

However, Missouri Governor Jay Nixon last week issued an executive order that decrees that couples in same-sex marriages can file their Missouri tax returns as married.

Kay Bell at the Don’t Mess With Taxes blog has more coverage here.

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