Landmark Marriage Equality Case Could Simplify Tax Filing for Same-Sex Spouses

Yesterday, the Supreme Court heard oral arguments in Obergefell v. Hodges, a case involving four state-wide bans on same-sex marriage. Although not a tax case, the Court's decision, expected this summer, could nonetheless affect same-sex spouses' taxes in a number of ways. This article examines the current law and some of the tax issues potentially implicated in this case.

General background and the Windsor case. Same-sex marriage became an increasingly prominent issue in the U.S. after the Hawaii Supreme Court held in '93 that the state's ban on same-sex marriage was unconstitutional. In '96, Congress enacted, and President Clinton signed into law, the Defense of Marriage Act (DOMA). Section 3 of DOMA defined marriage for purposes of administering Federal law as the "legal union between one man and one woman as husband and wife," and further defined the term "spouse" as "a person of the opposite sex who is a husband or wife." DOMA's legislative history indicated that it came about largely in reaction to the possibility that states would begin to legally recognize same-sex marriage.

In 2004, Massachusetts became the first state to allow same-sex couples to marry.

In 2013, in a 5-4 opinion, the Supreme Court, in Windsor, (Sup Ct 6/26/2013) 111 AFTR 2d 2013-2385111 AFTR 2d 2013-2385, struck down section 3 of DOMA as an unconstitutional deprivation of equal protection. Shortly thereafter, IRS adopted a "state of celebration" rule in recognizing same-sex marriages, stating that same-sex couples who were legally married in jurisdictions that recognize their marriages will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage.

Today, the majority of states have legalized same-sex marriage. However, a number of states still ban same-sex marriage.

The Obergefell case. The Obergefell case is actually a consolidation of six lawsuits in states that fall within the jurisdiction of the Court of Appeals for the Sixth Circuit. While the facts of each lawsuit are different, they all challenge state same-sex marriage bans. The issues specifically raised in the case are: (i) whether a state can refuse to allow same-sex couples to marry; and (ii) whether a state must recognize an out-of-state same-sex marriage.

Oral arguments. During the oral arguments on the first issue (the constitutionality of same-sex marriage bans), much of the discourse focused simply on framing the issue. Early on, Chief Justice Roberts, in discussing with the plaintiffs' attorney the longstanding understanding that marriage is between a man and woman, drew the distinction between joining and redefining the institution of marriage. Later, the attorney for the states said that this case "isn't about how to define marriage," but rather is "about who gets to decide that question." He then described his position as "asking you to affirm every individual's fundamental liberty interest in deciding the meaning of marriage" (emphasis added).

On the second issue (the recognition issue), Justice Ginsberg first clarified that if the individuals prevail on the first issue, the second is moot. In this case, Justice Alito stated, it would mean that the Court has decided that a state has a sufficient reason for limiting marriage to opposite-sex couples—so, the Chief Justice observed that the main logical hurdle for the plaintiffs (i.e., to prevail on the second issue) would be reconciling that holding with the fact that, up until same-sex marriage, it was "quite rare" for a State not to recognize an out-of-state marriage. The Chief Justice then observed that, given that "we live in a very mobile society, and people move all the time... one State would basically set the policy for the entire nation." Justice Ginsberg later noted that "it is odd... that a divorce...in one State must be recognized by every other State, but not the act of marriage."

What about taxes? In addition to the obvious social, political, economic, etc. ramifications of the Court's decision, there are also several tax implications.

Since the Windsor decision, same-sex married couples must generally file their federal tax returns as married (starting with the 2013 tax year, as well as for earlier years where the original return is filed on or after Sept. 16, 2013). However, for married same-sex couples who live in a state that doesn't recognize same-sex marriage, they have to file their state returns as unmarried taxpayers. This conflict causes couples in these states to incur added time, effort, and expense. Many state tax returns use the federal return as a starting point of sorts, and some states that don't recognize same-sex marriage require taxpayers to prepare a "dummy" federal return for purposes of completing their state return. The reverse problem can arise for same-sex couples who aren't married, but are in a state-sanctioned domestic partnership or civil union or similar arrangement—they cannot file a joint federal return, but may be able to file a joint state return.

Illustration1: A married same-sex couple lives in a state that doesn't recognize their marriage and requires "dummy" federal returns. The couple completes a joint federal income tax return, two individual "dummy" federal returns," and two individual state returns based on the two dummy returns.

Illustration2: A same-sex couple in a domestic partnership lives in a state that requires domestic partners to file a joint return based on a "dummy" federal return. The couple completes two individual federal income tax returns, one "dummy" joint return, and one joint state return based on the dummy return.

And, although the tax regimes of each state are beyond the scope of this article, there are a number of significant provisions common to all. These include, among other things:

• Filing status. Filing a joint return may, but won't necessarily, result in lower taxes.

• Deductions. The decision to itemize deductions or claim the standard deduction is made as a marital unit.

• Tax credits. Many tax credits phase out when income reaches a certain threshold, so the Court's decision could render taxpayers eligible for credits that they could not receive before, or ineligible for credits that they could receive before.

In addition, in states that impose estate and gift taxes, many have favorable provisions for transfers to or involving a spouse similar to the federal rules, such as a marital deduction or the ability to make split gifts.