Contact: Cohen & Company (Ohio, USA)
On June 26, exactly two years since its decision in United States v. Windsor striking down part of the federal Defense of Marriage Act (DOMA), the U.S. Supreme Court issued another landmark ruling regarding same-sex marriage. In Obergefell v. Hodges, the Court held that same-sex couples have a constitutional right to marry, effectively making same-sex marriage legal in all 50 states. The decision has numerous implications for the tax, estate and retirement planning of same-sex couples and will also affect some employers in states that had not previously recognized same-sex marriage.
From Windsor to Obergefell
In its 2013 ruling in Windsor, the Supreme Court found that a section of DOMA was unconstitutional. As a result, the federal government was required to recognize same-sex marriages in the states where it is legal. In the wake of the ruling, the government announced that it would also recognize any same-sex marriage if the couple got married in a jurisdiction allowing such marriages — even if the couple lived in a state that did not.
Even though the Windsor ruling didn’t recognize a constitutional right to marry, same-sex marriage has become legal in many more states since the 2013 ruling. By the time of the recent Obergefell decision, same-sex marriage was legal in about 75% of states. Now, under the 5-4 ruling, every state must allow same-sex marriage within its borders and recognize licensed same-sex marriages performed elsewhere.
Income Tax Effects
Perhaps the most obvious change for same-sex married couples living in states that did not recognize their marriages will be the simplification of the annual tax filing process. Since Windsor, these couples typically would file their federal tax returns as married filing jointly or separately and then file as singles (or heads of households, if eligible) for state tax purposes. This could mean additional fees and costs related to tax preparation and, in some cases, higher overall tax liability.
Going forward, every same-sex married couple will be required to file as married (whether jointly or separately) at both the federal and state levels — and will be eligible for state-level spousal tax breaks. If filing as a married couple would result in a lower state tax liability in states that prohibited same-sex marriage until now, it might be possible to file amended returns seeking refunds for previous years in which the couple was married.
There also are circumstances where filing as a married couple could bump a same-sex couple into a higher tax bracket. This often occurs when spouses have comparable income and is sometimes referred to as the “marriage penalty.”
The ruling’s effects on health care benefits could also affect a same-sex couple’s income taxes. Many employers have been offering domestic partner benefits that allowed an employee to obtain health benefits for his or her partner. But those benefits (and any other nonspousal benefits) represented taxable income for the employee if the couple was not married. After Obergefell, same-sex couples in every state can marry and obtain spousal coverage (where offered), which is not taxable and may be cheaper than domestic partner coverage.
On the other hand, with same-sex marriage now legal nationwide, it’s possible employers will begin to phase out domestic partner benefits that had originally been offered to provide equity in the benefits between married opposite-sex couples and committed same-sex couples who couldn’t legally wed. If an employer does choose to phase out domestic partner benefits, affected same-sex couples would need to marry to take advantage of the benefits. Of course, such a change would also have implications for opposite-sex unmarried couples who have been taking advantage of domestic partner benefits.
