Courts across the United States have only just begun to explore the legal and tax ramifications of same-sex divorce, which became possible when marriage equality was recognized by the Courts a few years ago. Many, but not all, same-sex couples can take advantage of the same tax benefits as other married couples. Chapter 19 of my book explores the tax problems that may arise in a same-sex relationship. In many ways, same-sex divorce is treated the same as other divorces, but there are some situations where the old rules do not apply.
Same-sex spouses who are legally married may transfer money and property between themselves, or into joint names, during their lifetimes or upon the death of one of them, free of the federal estate and gift taxes, by claiming the unlimited marital deductions afforded by § 2056 and § 2523 of the Tax Code, just like other married couples. The right of same-sex couples to claim the marital deduction was first established by the U.S. Supreme Court in United States v. Windsor, 570 U.S. ___, 133 S.Ct. 2675 (2013), and reaffirmed in Obergefell v. Hodges, 576 U.S. ___, 135 S.Ct. 2071 (2015).
In Windsor, Edith Windsor and Thea Spyer were married in Canada and then resided in New York. Spyer died in 2009, leaving her entire estate to Windsor, who claimed the unlimited marital deduction when filing the IRS Form 706 federal estate tax return. An IRS examination ensued, and the marital deduction was disallowed on the grounds that it was not available to same-sex couples, due to the federal Defense of Marriage Act (1 U.S.C. § 7)(“DOMA”). Windsor sued the IRS in federal court after paying the tax and filing for a claim for a refund.
When the case reached the U.S. Supreme Court, it was consolidated with a lawsuit involving the California voter referendum known as Proposition 8. The Supreme Court heard these cases together and struck down Section 3 of DOMA, which had created a federal definition of “marriage.” In New York, where Windsor and Spyer resided, the state’s law authorized same-sex marriages. At the time of Windsor, eleven states and the District of Columbia had enacted similar laws. In those states, the federal estate and gift tax exemption for married couples was extended to same-sex married couples.
On August 29, 2013, the IRS issued an Information Release announcing Rev. Rul. 2013-17. Rev.Rul. 2013-17 held that same-sex marriages would be recognized by the IRS if created in a state where same-sex marriages were legally recognized – even if the spouses resided in a state where their marriage was not recognized. This policy was consistent with a long-standing rule (Rev. Rul 58-66) that for federal tax purposes, the IRS will recognize marriages based on the law of the state where consummated, regardless of subsequent changes in domicile.
This ruling governed the tax treatment of same-sex marriages until the U.S. Supreme Court extended its principles in Obergefell v. Hodges, 576 U.S. ____, 135 S.Ct. 2071 (2015). By a 5-4 majority, the U.S. Supreme Court held on June 26, 2015, that the U.S. Constitution guarantees a fundamental right to marry, and the legal restrictions imposed on same-sex couples by DOMA were not justified. Federal and state laws that banned same-sex marriages are not constitutional.
Since then, same-sex couples have been treated like other couples for tax purposes, but only if they are legally married. Legally married same-sex couples may file joint income tax returns. As married persons, same-sex couples are required to name each other as beneficiaries of most retirement plans and life insurance policies provided by their employers unless spousal consent is given.
In a same-sex divorce, same-sex couples can divide marital assets without tax recognition (IRC §1041), and can pay and receive spousal support that is tax-deductible to the payor. These tax benfits are not available, however, to unmarried couples, even if they are registered as domestic or civil union partners. Same-sex couples who participated in these unions, but were never married, have a unique status under the law, as the federal government did not recognize their unions when Windsor was decided. Rev.Rul. 2013-17.
Brian C. Vertz represents clients in same-sex prenup and divorce matters in Pittsburgh and throughout Western Pennsylvania. His law firm is a powerful team of lawyers dedicated to family law. In Pittsburgh and Western Pennsylvania, call Brian at 412-471-9000 or use the contact form.