Supreme Court Case Has Tax, Benefits Implications for Married Gay Couples
April 1, 2013 by Kim Dixon and Patrick Temple-West
If the U.S. Supreme Court strikes down a federal law defining marriage as between a man and woman, the newfound rights for gay married couples may bear something not so welcome – a bigger tax burden.
That’s because with equality, gay couples will face the same tax woes of many heterosexual couples with similar incomes, including the tax hit known in America as the marriage penalty.
Taxpayers filing as married couples may be forced to pay higher taxes as their collective income crosses into a higher tax bracket sooner than if they were filing separately.
Oral arguments on Wednesday gave gay marriage backers hope the court would overturn the 1996 Defense of Marriage Act (DOMA) after a majority of the nine justices raised concerns about the law’s validity under the U.S. Constitution.
Taxes are at the very heart of the challenge to DOMA.
The case involves Edith Windsor and Thea Spyer, a New York couple. When Spyer died in 2009, DOMA prevented Windsor from enjoying one of the biggest tax breaks enjoyed by heterosexual Americans – the exemption from federal estate tax on wealth passed from one spouse to another.
If the law is struck down, the ruling extending the exemption to gay and lesbian surviving spouses would also clear the way to more than 1,100 federal benefits, rights and burdens linked to marriage status.
Cynthia Leachmoore, a tax preparer in Soquel, California, has about 40 same-sex married couples as customers ranging from teachers to Silicon Valley workers.
A handful of them have joint incomes that top $1 million. They’re facing $25,000 to $30,000 more in federal and state taxes if DOMA goes down and they file taxes jointly, she said.
“Most of them don’t care. They’d really like to be able to say that they were married” on tax returns, Leachmoore said. “That’s more important to them.”
Married gay couples would see other benefits, including a break in taxes now paid on health insurance and greater access to federal family and medical leave.
There are some 130,000 same-sex married couples in the United States as estimated by the Census Bureau, and nearly 650,000 same-sex couples, married and not, in total.
The Byzantine U.S. tax code’s marriage definition is not consistent. In some sections, the marriage provisions are defined for a “husband and wife.” Other places say “spouse.”
If the law is struck down, the Internal Revenue Service may need Congress to clarify the tax code, or the Obama administration may say same-sex married couples will be treated the same as opposite-sex marriages, said Annette Nellen, a tax professor at San Jose State University.
GOOD FOR TAX COFFERS
The nonpartisan Congressional Budget Office in 2004 estimated that recognition of gay marriage would, on net, help the budget’s bottom line by $1 billion a year over 10 years. The increased revenue would account for about 0.1 percent of total federal revenues at the time.
The Williams Institute, a unit of the University of California at Los Angeles School of Law, estimates that gay marriage may be good also for the fiscal health of states and localities that legalize it.
Of the 50 states, 31 have constitutional amendments banning gay marriage. It is legal in nine states and Washington, D.C.
The remaining states’ policies vary, with some recognizing marriage from other states, some providing some of the legal benefits of marriage and others denying marriage by state laws.
Williams Institute estimated that if Rhode Island legalized marriage, its coffers would gain $1.2 million in 2010 dollars over three years, largely due to lower spending on social welfare programs and increased income tax revenue and marriage license fees.
That is the small slice of the hundreds of millions in operating deficits Rhode Island is expected to be working under in the next five years, as estimated by a governor’s report.
Because of differing state laws, it is unclear what the impact might be in states with laws disallowing gay marriage.
Brian Moulton, an attorney with the Human Rights Campaign, said that if he married legally in Washington, D.C., and moved to Oklahoma, where gay marriage is not legal, the federal government might still recognize the union.
But Todd Solomon, a partner at law firm McDermott Will & Emery and author of a book on domestic partner benefits, said he was not so sure that would be the case.
“It is an open question as to what happens in Oklahoma,” he said. “Each state will still be allowed to legislate marriage.”
INCOME, ESTATE, HEALTH TAXES
Although the case was about the estate tax, only 3,600 estates owed the estate tax in 2012, according to government figures, and the wealthiest Americans pay most of it.
The end of DOMA might also save same-sex couples from having to pay some federal taxes on healthcare benefits they receive through a spouse’s employer. Unmarried domestic partners on average owe an extra $1,000 annually in taxes on these benefits because they are now taxed, according to Williams.
“Everyone will get a benefit if they were carrying health insurance,” said Nanette Lee Miller, head of non-traditional family practice at accounting firm Marcum LLP in San Francisco.
The impact on Social Security benefits will be mixed. DOMA prevents same sex couples from claiming the survivors benefits extended to married couples. But Social Security recipients might face greater taxes on their benefits because they will hit the level where the benefits begin to be taxed sooner if married.
(Writing by Kim Dixon; Editing by Howard Goller, Mary Milliken and Tim Dobbyn)