By striking down key provisions of the Defense of Marriage Act (DOMA) on June 26, the Supreme Court has brought about a major change in the way same-sex couples will be viewed in the eyes of the Internal Revenue Service.
In almost all areas of the Internal Revenue Code—from federal income tax to estate planning—the law carves out special rules that apply for married couples filing joint tax returns. While the ruling does not mean that all states must recognize same-sex marriages, it does mean that the federal government—including the IRS—will be required to treat those same-sex marriages that are recognized as valid for purposes of federal law.
While the ruling obviously represents a major step toward equality in general, in some areas, such as estate and Social Security planning, the ruling also represents a big win (tax-wise) for same-sex couples. High income same-sex clients, however, need to be prepared for the reality that their tax bills might be going up this year.
Federal estate tax rules have evolved in recent years to make it easier for married couples to avoid taxes when passing wealth after death. Same-sex clients will now be able to take advantage of these special rules. For example, the $5.25 (in 2013) exemption is automatically portable between spouses, meaning that same-sex couples can now count on shielding a combined $10.5 million from estate taxes without worrying about which spouse technically owns the assets.
Similarly, in the gift tax arena, married couples are permitted to pool their $14,000 (in 2013) annual gift tax exclusion so that each couple is able to make annual tax-free gifts of up to $28,000 per donee.
Same-sex couples may reap the greatest win based on their entitlement to Social Security spousal benefits under federal law. A married spouse who never worked (or who is not ready to begin claiming benefits) is still entitled to claim Social Security spousal benefits when his or her spouse uses the “file and suspend” strategy.
Under this strategy, one spouse files for benefits and immediately suspends those benefits after the second spouse begins claiming spousal benefits. This allows the couple to claim some Social Security benefits while allowing their earnings-based retirement benefits to grow.