By: Westray Veasey
I recently met with my first clients affected by same-sex couple legislation since the US Supreme Court overruled DOMA last year. If you recall, DOMA was the law barring the federal government from recognizing same sex marriages legalized at the state-level. It was ruled unconstitutional by the US Supreme Court for violating the Fifth Amendment. The IRS issued a statement on August 29, 2013, stating that same sex couples legally married in a jurisdiction that recognizes their marriage would be treated as married for federal tax purposes, regardless of the laws of their domiciliary state. As a result, same sex couples married in a state that legally recognizes their marriage will be entitled to marital deductions for estate and gift-tax, and must file their income tax returns with the status of “married” or “married filing separately.” (The Department of Labor issued a similar statement in Technical Release No. 2013-4, stating that for purposes of ERISA, legally married couples are treated as married, regardless of the laws of their domicile.)
North Carolina does not legally recognize same-sex marriage, so, where does that leave our clients are same-sex couples residing in North Carolina who were legally married in another state? NCDOR directive PD-13-1 provides that “because North Carolina does not recognize same-sex marriage as valid, individuals who enter into a same-sex marriage in another state cannot file a North Carolina income tax return using the filing status of married. Such individuals who file a federal income tax return as married must each complete a separate pro forma federal return for North Carolina, with a filing status of single, or if qualified, head of household or qualifying widower, to determine each individual’s proper adjusted gross-income, deductions, and tax credits per North Carolina’s filing code and attach a copy of the pro forma federal return to the North Carolina return.
My clients are considering getting married in a state that recognizes same-sex marriage, but they want to understand the legal implications if they do so. They are concerned about the “marriage penalty” for federal income tax purposes and the complexity of having different laws and rules for federal and state purposes. They do not have an estate tax problem, so the availability of the unlimited estate tax marital deduction is of no consequence to them. However, they are considering retitling the house that one of them currently owns to reflect a joint-title. I cautioned them that the title transfer could constitute a gift-tax if the value of the interest transferred exceeds the donor’s $14,000 annual exclusion. In fact, one partner’s use of funds for the benefit of the other in excess of the donor-partner’s annual exclusion in any year will require the donor-partner to file a gift tax return. If they are legally married, the gift-tax would not apply under those circumstances due to the unlimited marital gift tax deduction. My clients each have a 401(k) plan, and if they were to marry, they must designate each other as beneficiaries of those accounts, unless the spouse waives that right under ERISA. If a non-spouse is to remain a beneficiary of these accounts after they were married, spousal waivers must be signed.
As an advisor, if you have clients who are same-sex couples married in a state that recognizes same-sex marriage, and they have paid taxes or used exemptions (income, gift or estate tax) based on separate status, you may consider whether they can or should file amended returns based on married filing status to recoup taxes or exemptions. They should also be advised to revisit their beneficiary designations and estate planning documents if they have not done so already.
NCACPA is offering a webinar on this topic:
Life After DOMA–Marriage Benefits and Penalties for Same-Sex Couples
4/22 ▪ 9:00–10:40 am ▪ W117N
The Supreme Court decision in Windsor has dramatically altered the tax treatment of legally married same-sex couples. Although many will see tax savings from joint filing, more than half will get an unpleasant introduction to the “Marriage Penalty.” This webinar will provide advice these couples need to guide them through their new tax environment, including the decision whether to amend prior year returns or to let sleeping tax dogs lie.
Westray works at Poyner Spruill and advises individuals, fiduciaries and closely held entities in the areas of estate planning, business succession, income tax planning and estate and trust administration. She assists her clients in all aspects of formulating and implementing plans designed to protect and distribute their assets in a tax efficient manner. She works extensively in the areas of estate and trust administration. Westray also represents individuals and institutions with regard to various tax-exempt matters and the implementation of charitable giving. Contact Westray at 919-783-2987 or firstname.lastname@example.org