Tax Considerations for Gay and Lesbian Couples Before and After DOMA

Same-sex marriage has been a hotly debated topic lately, especially because the United States Supreme Court recently ruled on the subject in two separate cases. Because same-sex marriage is not allowed in a majority of states or under federal law, same-sex couples were until recently deprived of many of the privileges and benefits that married couples receive. One area in which same-sex couples who are unable to marry were disadvantaged is taxes.

Until recently, even in states where same-sex marriage is legal, the federal government treated married gay and lesbian couples differently than married opposite-sex couples when the couples file their taxes. This differential treatment occurred because the federal Defense of Marriage Act (“DOMA”) defined the term “marriage” narrowly as the legal union of a heterosexual couple. Consequently, the federal government did not respect the actual legal status of married gay and lesbian couples for any purpose. Heterosexual marriages were not recognized for federal income taxation, estate tax considerations, and gift tax considerations. As a result, gay and lesbian couples who filed as “married” for state tax purposes, had to file as “single” when filling out their federal income tax returns. At least that was the case until, DOMA was recently held to be unconstitutional by the United States Supreme Court.

Furthermore, until DOMA was overturned, a joint tenancy was a testamentary device commonly used by same-sex couples. Couples who hold property as joint tenants with a right of survivorship have to take into consideration that holding property with this type of ownership interest has some negative tax implications. In a joint tenancy, if one partner dies when the property is owned as joint tenants with a right of survivorship, the surviving partner receives ownership of the property automatically, regardless of what is stated in the decedent’s will or any other claims by outside parties. However, the value of the entire house may be considered in the federal income tax calculation for the surviving joint tenant. The surviving partner of a same-sex couple would then have the burden of proving that he or she contributed to the asset up the percentage claimed (up to 50% of the fair market value of the home). Treasury Reg. § 20.2043-1. If the partner is unable to prove his or her level of contribution, the entire value of the property can be included in the estate tax calculation, which could then trigger estate taxes.

Same-sex spouses also did not receive the same health insurance tax exemptions that a heterosexual spouse would receive. So, the health insurance that employers provide to their employees and their employees’ spouses who were heterosexual couples and therefore recognized under DOMA was considered a non-taxable fringe benefit under federal law. However, prior to DOMA being overturned, the same health insurance that is provided to an employee’s same-sex spouse or domestic partner was not exempt from federal income tax liability, even though it is similarly classified as a fringe benefit.

While this article is not exhaustive of all the various changes in tax consequences for gay and lesbian couples after DOMA was overturned, it does provide the reader with an abbreviated understanding of the hardships that same-sex couples faced under DOMA. If you or someone you know has an issue regarding tax considerations for gay or lesbian couples, please do not hesitate to contact the law offices of Chepenik Trushin LLP. The experienced attorneys at Chepenik Trushin are ready, willing, and able to assist with these tax issues. Please feel free to contact us for an initial consultation.