U.S. Supreme Court Rules Section 3 of DOMA Unconstitutional

The U.S. Supreme Court released the Edith Schlain Windsor case decision on June 26, 2013.  In a 5 to 4 decision, it held Section 3 of the Defense of Marriage Act (DOMA) unconstitutional under the Fifth Amendment to the U.S. Constitution providing for equal protection of persons.  DOMA was enacted in 1996 and Section 3 provided that Federal tax benefits for married persons were conditioned upon a legal marriage between one man and one woman.  The consequences of the decision will have far reaching implications for same-sex married couples.  The IRS announced on June 27, 2013 that it would act swiftly to provide guidance.

The Windsor case concerned the use of the unlimited marital estate tax deduction for the survivor of a same-sex married couple.  Ms. Windsor, as the widow, was denied the estate marital deduction.  She paid $363,053 of estate tax and sued for a refund and declaration that Section 3 of DOMA was unconstitutional.  A federal district court and the Court of Appeals (Second District) found in favor of the taxpayer.  Justice Kennedy wrote that while marriage law is within the province of the States, DOMA created unequal treatment of married couples within a state recognizing same-sex marriages.  For example, prior to this decision, a same-sex couple living in a state recognizing same-sex marriage was entitled to a joint state income tax return but had to file as two single persons for Federal tax purposes; whereas an opposite-sex married couple could file a joint Federal tax return.  Now it appears that a Federal joint income tax return is permitted, so both kinds of marriages would be entitled to have the same filing statuses apply.  Questions arise as to how to handle past tax returns, some of which may be closed by the three-year statute of limitations.  Some same-sex taxpayers may have filed protective refund claims to hold open the statute of limitations pending the outcome of this case.

Now legally married same-sex couples who are recognized as married for Federal tax purposes will enjoy the same tax benefits and suffer the same “marriage tax penalties” as opposite-sex married couples.  Each couple’s situation will differ and tax planning should be tailored to individual circumstances and personal goals.

There will also be implications to employee benefits.  These include:

1.     Spousal coverage under employer-provided health insurance.

2.     COBRA continuation of health insurance.

3.     Spousal right to pension plan joint and survivor annuities.

4.     Spousal consent to name a non-spouse beneficiary of a defined contribution retirement plan.

5.     Retirement plan and IRA minimum required distribution and rollover provisions.

6.     Qualified domestic relations orders (QDRO) for dividing retirement benefits in a divorce.

7.     Qualifying for exchange premium support credits under Obamacare.

How will this decision impact legally married same-sex couples who move to a state that does not recognize the marriage?  Will they be able to file joint Federal tax returns even though required to file single person state income tax returns?  Section 2 of DOMA was not before the Supreme Court.  Section 2 provides that states do not have to recognize same-sex marriages performed in other states.  Democrats have introduced the Respect of Marriage Act in the U.S. House of Representatives.  The Act is designed to repeal Section 2 and to require states that do not permit same-sex marriages to recognize same-sex marriages legally performed in other states.