Taxing Same-Sex Marriage Post-DOMA

I realize that today’s decision in United States v. Windsor isn’t just about taxes. But it’s enough about taxes.

The dispute in Windsor is all about the estate tax. The estate tax applies to estates in excess of a specified amount. In 2013, the exclusion amount is $5.25 million. That means that, if I die, I can leave up to $5.25 million to my heirs without the government imposing any estate tax on my estate.[fn1] If, however, I left $6 million, my estate would pay the estate tax on $750,000.[fn2]

But there’s an exception: I can leave an unlimited amount to my spouse without triggering the estate tax.

Edith Windsor and Thea Spyer married in Ontario, Canada, in 2007. Though New York did not, at the time, solemnize same-sex marriages, it did recognize those that had been performed legally elsewhere. When Spyer died in 2009, she left her full estate to Windsor. Because Windsor was her spouse, there was no estate tax imposed.

Or, at least, that’s how it would have been without the Defense of Marriage Act (“DOMA”). Section 3 of DOMA prevented the federal government from recognizing any marriage except those between one man and one woman. As such, Spyer’s estate owed, according to the government, $363,053 in estate taxes.

As a practical matter, then, the Supreme Court’s ruling means that, because Windsor and Spyer were spouses for federal tax purposes, Spyer’s estate was not subject to the estate tax, and is due a refund of $363,053 plus interest.

The ruling also has practical significance for same-sex spouses other than Windsor and Spyer. Other surviving spouses (at least, those wealthy enough to have received a significant inheritance from their deceased spouse) will likely be able to file for and receive a refund, for example.

More interesting to me, though, is the consequences going forward. Same-sex spouses will, effective for their 2013 tax year, be unable to file returns as unmarried individuals; instead, they will have to chose between filing jointly or filing as married individuals filing separate returns. Married individuals filing separate returns almost always pay more in taxes than either unmarried individuals or married couples filing jointly; the question, then, becomes, will same-sex couple filing joint returns pay more or less in taxes than they did when DOMA forced them to file as unmarried individuals?

The answer depends on the relative amounts they earn. If one spouse earns significantly more than the other, they will generally pay less, collectively, in taxes than they did when they filed separately (the so-calledĀ marriage bonus). If, on the other hand, they each earn roughly the same amount, they’ll probably pay more (theĀ marriage penalty).

That said, by being able to file as spouses for federal and state purposes, they’ll probably save significantly on tax preparation costs, meaning that, even facing the marriage penalty, same-sex couples may still come out ahead financially.

An aside: Justice Kennedy’s opinion broadly claims that DOMA is unconstitutional. In fact, the opinion only eliminates Section 3; Section 2 (which permits states to refuse to recognize other states’ same-sex marriages) still stands. And I’m curious if Section 3 is actually gone—the context of the opinion, as well as the penultimate sentence, could be read to apply only to same-sex marriages legally recognized by a state. (That’s how Scalia, in his dissent, seems to read the language.)

But what if a state were to legalize polygamous marriage? I’ve done some thinking about how the tax system could deal with legalized polygamous marriages. DOMA (at least before today) would have required the federal government to disregard such marriage. And Kennedy’s opinion clearly leaves room for the federal government to refuse to recognize state-sanctioned polygamous marriages.[fn3] But would Congress have to pass new legislation, or would Section 3 of DOMA still apply to non-same-sex marriages? I don’t know, but I’m interested in figuring it out.

[fn1] Or, at least, I could, if I had $5.25 million to leave to my heirs.

[fn2] It’s worth noting, however, that inheritances are not included in gross income, so my heirs wouldn’t owe any income tax on what they received.

[fn3] The opinion doesn’t mention polygamy, of course, but Kennedy writes that DOMA is unconstitutional because “[t]he principal purpose is to impose inequality, not for other reasons like governmental efficiency.” That seems to suggest that, if not recognizing polygamous marriage served another purpose, like promoting efficiency (and it would be easy to make an argument that it would), DOMA—or a DOMA-like law—could be constitutionally permissible.

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