Last month, the United States Supreme Court issued a ruling in the case United States v. Windsor that struck down as unconstitutional a part of the federal Defense of Marriage Act (“DOMA”) that defined “marriage” for federal law purposes as only applying to one man and one woman married pursuant to the laws of one of the States. This ruling has significant estate planning and tax implications for same-sex spouses that have been married pursuant to the laws of the increasing number of States that recognize same-sex marriage.
In fact, Windsor was actually an estate tax case at its core. Under the federal estate tax system, a person’s estate is not subject to estate taxes for the portion of the estate that is left to that person’s spouse. However, prior to Windsor, DOMA prevented same-sex spouses from enjoying this “marital deduction” against the estate tax. Because of DOMA, the same-sex spouse in the Windsor case had to pay over $360,000 in federal estate taxes to the IRS. With the Supreme Court’s decision, that amount will be refunded to the same-sex spouse.
The repeal of that section of DOMA has other far-reaching implications for same-sex spouses, including:
• Same-sex spouses may now file their income tax returns as “Married Filing Jointly.” This should result in lower income taxes paid by these couples in most circumstances. These couples should even be able to amend their three most recent income tax returns filed to change their filing status, and could potentially receive a refund of some of the taxes they have already paid.
• Same-sex spouses should also qualify for Spousal Rollovers of IRA, 401(k), and other retirement accounts after one spouse passes away. This benefit could result in significant income tax deferral and tax-deferred growth of assets in those accounts.
• Same-sex spouses can now exclude up to $500,000 of capital gains on the sale of a primary residence, even if the house was owned in the name of only one of the spouses.
• Same-sex spouses will now enjoy the estate tax benefits given to married couples, including the marital deduction as discussed above, “portability,” and gift-splitting. Each of these benefits can result in significant estate tax savings.
With each of these benefits, and many others now afforded to same-sex spouses, there is a possibility of significant tax savings and possibly tax refunds when amending previously filed income, estate, or gift tax returns. At the Dana Law Firm, we can assist all married couples to make sure that they receive the full benefits of the law. To discuss your situation in person, give us a call at 480-515-3716 to schedule an appointment with one of our attorneys.
Written by Scottsdale estate planning attorney Trevor Whiting