Same-sex couples (“SSCs”) were awarded a major victory by the U.S. Supreme Court in 2013 when Section 3 of the Defense of Marriage Act (“DOMA”) was declared unconstitutional in the case of United States v. Windsor, 133 S. Ct. 2675 (2013). Before being struck down, Section 3 of DOMA defined the word “marriage” to mean a legal union between one man and one woman as husband and wife, and the word “spouse” to refer only to a person of the opposite sex who is a husband or a wife. In Windsor, the Supreme Court held that Section 3 of DOMA was unconstitutional because it violated the constitutional principles of equal protection.

Among the sweeping effects of the Windsor decision are its federal tax consequences. The Internal Revenue Service (“IRS”) will now recognize the marriage of SSCs (regardless of where the couple lives) so long as the marriage was entered into in a state whose laws authorize the marriage. After the Windsor decision, the IRS published guidance clarifying how Windsor would be interpreted for federal tax purposes. Essentially, the IRS stated that any reference to “spouse” in the Internal Revenue Code (the “Code”) would include individuals married to persons of the same sex, so long as the couple is married under state law, and any reference to “marriage” in the Code would include a marriage between individuals of the same sex. Further, the IRS also determined that terms such as “husband,” “wife,” and “‘husband and wife” should be interpreted to include same-sex spouses.

Income tax consequences

As of September 15, 2013, the Windsor decision affects married SSCs’ federal income taxes in multiple ways. The first change many SSCs will encounter is their filing status and tax brackets on Form 1040. Before Windsor, each member of an SSC had to file as an individual because the marriage was not recognized for federal tax purposes. If the SSC had children, one of the members of the SSC claimed the children as dependents and typically filed as the “head of household.” Now, SSCs who are recognized as married for federal tax purposes must file in the same manner as opposite-sex couples file – specifically, as either married- filing-jointly or married-filing-separately. Further, married SSCs who file jointly (as do the vast majority of opposite-sex married couples) may also be subject to new tax brackets that will either increase their tax liability (the so-called “marriage penalty”) or reduce their tax liability (the so-called “marriage bonus”).

Windsor may impact other aspects of married SSCs’ federal income tax liability. For example, the application of certain tax credits and employee compensation may be affected on a case-by-case basis.

Estate Tax Consequences

The facts of Windsor involved the interpretation of the federal estate tax – specifically, the unlimited marital deduction allowing a spouse to transfer all of her assets to her surviving spouse at death without incurring any estate tax liability. Since married SSCs were not recognized as “married” for federal tax purposes prior to Windsor, surviving SSC spouses were denied the same deduction. Now, in light of Windsor, high net worth married SSCs can enjoy the estate tax deferral that comes with the unlimited marital deduction. As a result, there are many estate-planning opportunities now available to high net worth married SSCs that were not previously available.

In addition to the marital deduction, married SSCs can also now take advantage of transferring their lifetime exemption – that is, the amount a person can gift in a lifetime without incurring any federal gift tax – since unused lifetime exemptions pass to surviving spouses.

Amending Returns

The U.S. Department of Treasury and the IRS have clarified that married SSCs may (but are not obligated to) file amended returns for open tax years (usually the previous three years) if their married status would result in a refund. This opportunity applies to both income tax filings and estate tax filings. Amending previous year returns may result in a refund or it may result in additional tax.

Conclusion

Windsor represents a paradigm shift for married SSCs with respect to federal income and estate tax. The most recent statistics from the Government Accountability Office show more than 1,100 U.S. statutory provisions that factor marital status into the equation. Of those provisions, more than 200 were from the Internal Revenue Code. These changes range from drastic and obvious to relatively inconsequential and nuanced. Married SSCs are encouraged to consult with their financial and tax advisors to better understand the new federal tax landscape.