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Taxes for same-sex couples

By Kay Bell ·
Tuesday, March 26, 2013
Posted: 2 pm ET

Will same-sex couples be able to legally marry? Just as important to the tax world, will they be able to take advantage of the many tax breaks that are now claimed by heterosexual married couples?

The U.S. Supreme Court should let us know by the end of June.

The country's high court Tuesday heard arguments on the constitutionality of California's Proposition 8, a ballot initiative in November 2008 that overturned that state's short-lived right of same-sex couples to marry.

The fundamental question is whether a government can deny gay people benefits that are legally granted to heterosexual couples. The decision in the California case could be sweeping, making same-sex marriage legal nationwide. Or the justices could limit their ruling to the Golden State.

I'm more interested, however, in the case that will be argued before the court Wednesday. In that one, Windsor v. United States, a New York widow is specifically challenging the Defense of Marriage Act because of how it affected her with regard to the federal estate tax.

The federal Defense of Marriage Act, or DOMA, was enacted in 1996 and defines marriage as the legal union of one man and one woman for federal and interstate recognition purposes in the United States. While states can recognize same-sex marriage within their borders, no state or political subdivision therein is required to recognize a same-sex marriage from another state.

On the federal level, DOMA makes different treatment of spousal benefits legal when it comes to same-sex couples. That means that rights a married man or woman might have under federal law, such as insurance benefits for government employees, Social Security survivors benefits and the filing of joint tax returns, are not the same as for same-sex married couples.

The tax implications became very clear to Edith Windsor after her wife, Thea Spyer, died in 2009. Windsor and Spyer were legally married in 2007 in Toronto, and their marriage was recognized by New York, where they lived.

But when it came to sorting out the estate tax issues following Spyer's death, Windsor discovered that she owed a federal estate tax bill of more than $363,053. The reason? DOMA prevents the Internal Revenue Service from recognizing Windsor as a surviving spouse. If Windsor were a man, Spyer's full estate would have passed to her tax-free.

Lower courts upheld Windsor's case, saying the tax code treated her unfairly based on her sexual preference. We will hear her attorneys' arguments as to why the Supreme Court should rule the same way on March 27.

If the court decides for Windsor, she'll get back her federal estate tax overpayment.

More importantly, other same-sex couples who are legally married -- and who have been filing state tax returns as married couples -- will be meeting with their tax professionals to reassess their federal tax filing status situations.

We'll see a lot of amended returns (back to the three-year time limit) to claim spousal tax breaks they were denied.

Since the federal tax code does offer married couples many tax advantages, the demise of DOMA also could mean a short-term hit on the U.S. Treasury. But that's a small price to make our tax system fairer, a result that almost everyone says they want.

And in some cases, other married same-sex couples might find they are in federal "marriage penalty" territory. This is where a couple pays more in taxes when they file a joint return than they would have if they'd filed as two single taxpayers.

The penalty has been lessened by the broadening of the tax brackets through the 25 percent income tax rate. But where both partners earn higher, relatively equal incomes, the marriage tax penalty still comes into play somewhat.

But, to paraphrase the old marriage joke for tax purposes, gay and lesbian couples deserve the same right to pay higher taxes as traditional couples do.


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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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