The 1996 Defense of Marriage Act deprived same-sex married couples of many of the benefits that come with being married, including more than 1,000 federal regulations with potentially big financial ramifications. When the Supreme Court struck down the heart of the law on Wednesday, it was not only expanding married gay couples’ rights but also, in many cases, their pocketbooks.
As gay rights advocates have had recent successes at the ballot box and in court, they have largely used a personal message about the ability to enter a committed, loving relationship. But in striking down Section 3 of DOMA – which defined marriage for federal purposes as solely between one man and one woman – the Supreme Court’s decision will also have a financial impact on gay couples. Depending on a couple’s financial situation -- and possibly what state they live in -- there may be big tax benefits for many gay Americans.
The case itself, United States v. Windsor, illustrated the financial ramifications of DOMA. Edith Windsor, whose partner of 44 years passed away in 2009, was forced to pay more than $360,000 in federal estate taxes that she would not have been on the hook for had the Internal Revenue Service recognized her 2007 Canadian marriage (which was recognized by her home state of New York).
The economic effects of the law were not lost on Justice Anthony Kennedy, who sketched out in his majority opinion the financial burden the law placed on gay married couples as well as their children. DOMA “prevents same-sex married couples from obtaining government health care benefits they would otherwise receive. It deprives them of the Bankruptcy Code’s special protections for domestic-support obligations. It forces them to follow a complicated procedure to file their state and federal taxes jointly,” Kennedy wrote. “It raises the cost of health care for families by taxing health benefits provided by employers to their workers’ same-sex spouses. And it denies or reduces benefits allowed to families upon the loss of a spouse and parent, benefits that are an integral part of family security.”
Though same-sex couples (if they live in a state that recognizes their marriages) will now be eligible for these benefits, whether or not a particular couple’s tax bill will go up or down depends on each couple’s finances, though typically filing jointly will lower a couple’s tax rate. Moreover, the ruling still leaves gay married couples in a precarious position; it struck down the section of the law that prohibited the federal government from recognizing gay marriages for the purposes of federal benefits, but it left intact the provision that allowed states not to recognize marriages performed in other states. Accountants are now waiting on guidance from the IRS about how gay married couples can file their taxes going forward.
“We’re not exactly sure how federal tax filings are going to be impacted,” said Michael Fine, who runs an accounting practice in Washington, D.C., where gay marriage has been legal since early 2010. “The logical thought process would be that if your marriage is legally recognized in your state of residence or your local jurisdiction like Washington, D.C., here for example, the federal government would not be able to prevent you from filing a joint income tax return as any married couple would.”
But what happens to gay couples who live in -- or move to -- a state that doesn’t allow gay marriage is not yet clear. “We’re going to have to play the wait-and-see game here and see how the federal government’s going to deal with this – how they are going to allow or not allow individuals to file. It’s going to be very interesting,” Fine said.
Fine, who is gay, said 30 percent to 40 percent of his business is gay couples. “It’s very exciting for us today,” he said.
But even outside of tax filings, Fine points out that there are significant costs associated with not having a federally recognized marriage – costs that Fine hopes the DOMA decision will begin to cut into. “Just from personal experience, I just recently shelled out several thousand dollars so that my partner and I can have certain types of legal protections when we leave D.C., certain HIPAA releases and powers of attorneys so that if we were to ever go on vacation to a state that doesn’t recognize our union, that we wouldn’t have to worry if one of us got sick about the other one coming in and making decisions,” Fine said.
Though individual situations will differ, DOMA has had a broad economic impact by requiring gay couples to pay taxes that straight couples in the same situation need not. For example, DOMA excluded gay married couples from a tax exemption on employer-provided health insurance, spousal retirement and health benefits for federal employees and health insurance and survivor benefits for military couples. Under DOMA, gay married couples also were denied some Social Security benefits, depriving a “retired same-sex couple of up to $14,484 per year and a surviving same-sex spouse or partner up to $28,968 per year,” according to a 2013 report from the liberal Center for American Progress, the Human Rights Campaign (a gay rights lobby) and the Movement Advancement Project.
“Employment benefits is probably the biggest area where both employers and married same-sex couples will benefit from the ruling today,” said Andrew Cray, a policy analyst on LGBT issues at the Center for American Progress. “Married same-sex couples were heavily impacted by excessive taxation on benefits for the spouse of the gay employee, and with today’s ruling, employers will be able to provide pre-tax health benefits to the spouses of employees who are in a gay or lesbian marriage.”
Cray notes that employers will be happy about the ruling too – the changes will mean their employees will be healthier, more satisfied with the coverage and less likely to leave a job that offers benefits for their spouses. It makes business more “competitive” in recruiting and keeping talented LGBT employees, he said. However, just like with their taxes, gay married couples in states that to not allow gay marriages will still have to wait and see how the federal government decides to handle these benefits in the wake of the court's decision.
But for many gay couples in states that have same-sex marriage, the ruling means it's time for financial planning and reassessment. “I already got an email today about whether or not somebody is going to be able to file jointly next year,” Fine said, predicting a steady flow of questions from clients over the next few weeks as they figure out how the decision will affect them. “This is going to have far-reaching and broad implications from a tax standpoint.”