Love and Taxes

As followers of Freed Marcroft’s Facebook page are well aware, this week the United States Supreme Court is set to hear arguments of two landmark cases impacting the rights of same sex couples in America — Hollingsworth v. Perry on Proposition 8, the anti-gay marriage initiative in California, and Windsor v. United States on the federal Defense of Marriage Act (“DOMA”).

As I discussed on Colin McEnroe’s show on WNPR about divorce this month, the Court’s ruling on Proposition 8 has sweeping implications for same sex couples’ constitutional rights.

The Court’s ruling on DOMA could have sweeping implications on their wallets.

As a result, it may make sense for same sex married couples to file a “protected claim amended return” along with their taxes this year.

Here’s why:

Section 3 of DOMA is the portion of the federal law that declares marriage to be only between a man and a woman.  As a result, the federal government denies benefits to same-sex couples that are commonplace for heterosexual couples, like insurance for government workers’  and benefits for Social Security survivors’.  And, as is particularly timely given April 15′s  rapid approach, the IRS does not recognize same sex couple’s legal marriages.  So, a Connecticut married couple who happens to be same sex must file individual federal tax returns.

The financial implications of the unequal treatment can be significant.  For example, thanks to DOMA, Edith Windsor, the (fantastic, read about her) plaintiff in Windsor, was not treated as a surviving spouse when her wife, Thea Spyer, passed away in 2009.  Under the tax code, the marital deduction allows an unlimited deduction from estate and gift tax that postpones the tax on assets inherited from each other until the second spouse dies.  As long as you’re straight.  Ms. Windsor, rather than be entitled to the unlimited deduction, paid more than $600,000 in state and federal estate taxes.

DOMA can have a major impact on same sex couples’ annual tax returns, too.  According to an analysis by H&R Block, same sex couples can pay as much as $6,000 more a year than married opposite sex couples.

If the Supreme Court rules DOMA unconstitutional, the IRS will treat same sex married folks just like all other married folks.  But, starting when?  If you find that filing jointly will be a benefit to you, how many years of tax returns can you amend to reflect the change in the law?

Generally, the IRS will allow taxpayers to amend their tax returns for the prior three years.  Since it is unlikely that the Supreme Court will issue its decision on DOMA before April 15, same sex couples will have to file separate federal return for 2013.

And, since the ability to file an amended return for tax year for 2009 also closes on April 15, 2013, in order to maximize the number of years that they are entitled to, couples for whom this ruling would make a difference need to file by that date what is known as a “protective claim amended return,” for 2009.  This serves to alert the IRS that they want to file as married if DOMA is overturned and preserves their right to file an amended 2009 return in addition to 2010, 2011, 2012, and 2013.

And then, we wait and watch the Supreme Court.