I had the good fortune of speaking this afternoon with Ms. Jane Bernardini, CPA, a tax partner at Anchin Block & Anchin LLP in New York City. We discussed some of the tax implications for New York gay and lesbian couples of the Supreme Court's ruling in United States v. Windsor that section 3 of the Defense of Marriage Act was unconstitutional.
Ms. Bernardini said, "New York passed the law two years ago allowing same-sex couples to marry." On June 24, 2011, the NY State Legislature passed and Governor Cuomo signed into law the Marriage Equality Act. Since then, same-sex spouses have been able to file jointly with New York State, but had to file as single on their federal tax returns.
For gay and lesbian spouses in New York, "the next step is to file amended tax returns," with the IRS, "as they are now able to file jointly," Bernardini said.?? "New York State did allow joint filing," for state tax returns, so couple's state tax returns probably don't need to be changed. Similarly, New York City taxes follows the same rules as the state, so changes aren't anticipated with city taxes.
New York also allows for couples to enter into domestic partnerships. "We do have domestic partnerships, and heterosexual couples were? using the partnership agreement ?to obtain health benefits for one of the partners," Bernardini said. "But it's kind of gone aside as now employers claim the ?gay couple can get married." She related a story of one client who said that "not until the federal government accepts us will we get married." So there may be an uptick in people getting married.
Federal Tax Implications
"This is going to take time," Bernardini cautioned, "it will take the federal government I don't know how long to straighten out." Some of the "big issues" at the federal level include Social Security benefits, pension plans and survivor benefits, and taxable fringe benefits. "Language has to be changed," Bernardini said, from terms like 'husband and wife' to more neutral terms like 'spouse 1 and spouse 2.' Language will have to be changed not just in the laws, but in plan documents. "Be a little patient until everyone catches up with the law," Bernardini reiterated.
Fringe benefits, such as for health insurance coverage, is a key issue. For New York same-sex couples where one spouse was covering his or her spouse through their employer's group plan, " the federal government was not recognizing the marriage and the insurance premiums for the other spouse was taxable fringe benefits," Bernardini said. Couples in this situation can "amend their federal returns to get a refund" on the taxable fringe benefits that really should have been tax-free. Bernardini explained that the employee would have been "informed by their employer what the amount was, there would have been another line on the W-2 for taxable fringe benefits," Bernardini said.
On the topic of retirement benefits, Bernardini mentioned that same-sex spouses may have taken an annuity from private or government retirement plans, but the plan did not allow the surviving same-sex spouse? to continue distributions as a spouse. Surviving spouses may want to take another look at their deceased spouse's annuity to make sure they "got the benefits they were entitled to," for example they may be eligible for different benefits as a spousal beneficiary.
Similarly, persons may want to take another look at the employer-provided death benefits. Especially at government jobs, the employer might not have paid death benefits to the surviving spouse as their marriage was not recognized at the federal level. Bernardini mentioned the case of "a woman in the army who died, and the government denied the death benefits to her wife." There may be an opportunity to go back and receive those benefits. The Defense of Marriage Act "went into effect in 1996," Bernardini reflected, and so we may need to go back and look at what benefits might be available over that period of time.
Estate and Gift Tax Issues
"Any couple that is living in a state that recognizes same-sex marriage should revisit their wills to provide for? the full marital deduction" against the estate tax.
Also, for persons whose same-sex spouse has died, they may want "to file for refund on estate tax."
Similarly for the gift tax, "living expenses were considered a gift to the other spouse," and one spouse may have filed gift tax returns to report the value of the living expenses given to the other spouse. Now that their marriage is recognized for federal tax purposes, they may want to "amend gift tax returns to remove the value of imputed gifts," as spouses are allowed to transfer an unlimited amount of assets between themselves without gift tax consequences. There's a possibility here to correct a person's lifetime estate and gift tax exclusion and/or gift tax calculations.
Bernardini also cautioned that some same-sex couples have set up Grantor Retained Income Trusts (GRIT). "GRITs are a way of giving assets to their partner while retaining the income, but you can only create these trusts with a non-relative. Now that the partner is considered a spouse, if they had set up a GRIT, they will need to wait for guidance from the IRS. It is not certain as to whether? the IRS will determine the trust remainder to be a taxable gift."
Moving to Other States
What happens when a same-sex couple gets married in one state and moves to another state which does not recognize their marriage? Bernardini mentioned the story of one couple who are "about to get married in New York and then move to Florida, where same-sex marriage is banned. We really have to plan for non-recognition states."
Wait and See
"We're waiting ?for the IRS to come out with a lot of different regulations," Bernardini said, "there's a lot of uncertainty." Bernardini anticipates the IRS to provide guidance on how the three-year statute of limitations on refunds will apply to same-sex married couples. The IRS "may make an exception or they may not," she said.
What is clear is that "if they were married within the last three years, definitely look at amending federal tax returns. Similarly, if their spouse passed away? within the last 3 years, file an ?amended estate returns."
IRS Releases Statement on the Supreme Court Case
The Internal Revenue Service today issued the following statement:
"We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future."
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