US Supreme Court issues its decision on same sex marriages
TAX ALERT |
On June 26, 2015, the U.S. Supreme Court issued its decision in Obergefell v. Hodges, ruling that every state must license the marriage of same sex individuals and recognize a valid same sex marriage when performed out-of-state.
The landmark 5-4 decision in Obergefell comes two years after the Court held in the Windsor case that a key provision of the Defense of Marriage Act was unconstitutional. In the wake of the Court's decision in Windsor, numerous states that had not previously recognized the rights of same sex couples to marry enacted legislation permitting such unions. Lower federal and state courts moved swiftly as well, interpreting Windsor as creating a constitutional right to marry. But, 13 states resisted this trend and refused, either through state constitutional provisions or legislation, to sanction or recognize same sex marriages. The U.S. Court of Appeals for the Sixth Circuit ruled last year in the Obergefell case that the issue should be governed by state legislatures or state voters and that there was no constitutional right to marry, an approach which garnered four votes among the Justices. However, the majority of Justices rejected this view and concluded that the exclusion of same sex couples from a right to marry denied them legal equality and due process under the Fourteenth Amendment. Justice Kennedy, who also authored the Windsor opinion, was joined in this opinion by Justices Kagan, Sotomayor, Ginsburg and Breyer.
The impact of this decision will be felt at the federal, state and local levels, and will likely take some time to fully play out.
At the federal level, the IRS, following Windsor, established a place of celebration rule. Under that rule, same sex couples legally married in a state or jurisdiction that recognized their marriage were married for federal tax purposes regardless of where they lived or were domiciled. Because Windsor found a key provision of DOMA unconstitutional, that legislation was treated as if it had never been enacted. This spurred many married same sex couples to seek the tax benefits of marriage, including the unlimited marital deduction established in the estate and gift tax laws, portability and spousal rollover rights, from the IRS in amended filings and petitions. Dozens of cases are pending around the U.S. involving the retroactive effect of Windsor in the areas of employee benefits, survivor benefits, welfare benefits, etc. The Obergefell decision will likely render the place of celebration rule moot and spur more such filings and cases, as married same sex couples force their home states to recognize their marriage from its inception.
At the state level, in the 13 states that banned same sex marriage, same sex married couples were required to file their income tax returns on a separate basis rather than a married-filing-jointly basis. Taxpayers in this situation who filed their federal returns on a married-filing-jointly basis were forced to prepare "dummy" separate federal returns in order to prepare their separate state and local income tax calculations. Taxpayers will no longer have to take that step, and, to the extent that married couples in the 13 states have not yet filed their 2014 income tax returns, the states will have to recognize the federal joint return and accept a state joint return given the Court's determination that the failure of a state to recognize a valid same sex marriage is unconstitutional. Furthermore, in those states that also imposed a separate estate or inheritance tax and denied same sex married couples the use of spousal benefits, the Obergefell decision will expand the applicability of spousal exemptions to same sex married couples and opens the door to retroactive claims for taxpayers whose same sex partners are deceased as is the case with two of the Obergefell petitioners. Revenue agencies in the 13 states will likely issue guidance in the coming weeks on these and other issues.
Taxpayers impacted by the Obergefell decision should review their prior filings and consider whether to file amended returns to claim any refunds that may be due. Additionally, taxpayers should review their current year withholding, and determine whether a catch up payment will have to be made. Lastly, taxpayers should consider the impact of the Obergefell decision on their estate planning and adjust their planning accordingly.