As you've surely heard, today, the U.S. Supreme Court declared critical portions of the Defense of Marriage Act (DOMA) unconstitutional. For those who don't know, although some states (including New York) have recognized same-sex marriage as legal, DOMA defines marriage to exist only between a man and a woman - denying same-sex couples a multitude of federal benefits and rights which heterosexual couples regularly enjoy.
In United States v. Windsor, Edith Windsor was legally married in New York to Thea Spyer but was slapped with $363,000 federal estate tax bill because she was denied use of the spousal exemption to the federal estate tax. Today, the Supreme Court ruled that DOMA's definition of "spouse" and "marriage" as exclusively heterosexual is in violation of the U.S. Constitution's Fifth Amendment right to equal protection. You can read the decision here.
But why should you, purely from the point of view of a professional in the real estate industry, care about this decision? Taxes, taxes, and more taxes. Real estate holdings are often a couples' most valuable assets. Left unattended, these assets can create some tax headaches down the road when it comes time to transfer title.
Estate Tax and Gift Tax Spousal Exemption
The Internal Revenue Code ("IRC") has an exemption which allows a spouse to leave their entire estate, regardless of value, to their surviving spouse - tax free. This exemption was the genesis of Edith Windsor's lawsuit. She was taxed on the inherited estate of her spouse because DOMA barred her from using the unlimited spousal exemption. If you prefer to transfer your assets while alive, the IRC also provides for a gift tax exemption. Normally, each person may only "gift" a certain amount of assets each year, and/or over the course of their lifetime. However, if you make that gift to your spouse, there are no limits to the amount you transfer. Now, with the Supreme Court's DOMA decision, same-sex spouses can use the same spousal exemptions that heterosexual couples have been using.
Internal Revenue Code Section 121- Primary Residence Capital Gains Exemption
IRC Section 121 expands the maximum capital gains tax exemption for the sale of a primary residence from $250,000 to $500,000 in the case of married couples filing a joint return. Even further, this section permits the surviving spouse to claim a $500,000 exemption if the sale is made within two years of the death of their spouse. Now, same-sex couples have access to the larger capital gains tax exemption for married couples.
Doubling and Splitting of Tax Exemptions
There are a few cases where the IRC permits married couples to double or split exemptions. For instance, compared to a single individual, a married couple may double the amount gifted each year without reporting the gift to the IRS. As another example, in 2013, each estate has a blanket $5.25 million exemption from taxes. However, a surviving spouse may be able to utilize unused portions of their deceased partner's estate tax exemption to expand their own exemption to over $10 million. With the Supreme Court's DOMA decision, same-sex couples now have more options to play with when planning their estate.
Federal Income Tax
For all the good news the DOMA decision brings, it might not be all sunshine and roses for same-sex couples in terms of tax benefits. Filing jointly does not necessarily mean lower income tax liability, and in fact, can often lead to greater tax liability. Every individual case is different and each couple should fully explore what effects a joint filing will have on their tax liability.
GO SEE A TAX PROFESSIONAL!
Every individual is strongly encouraged to seek the advice of a tax and/or estate planning professional if they have any questions regarding the application of these tax benefits. Whether you are a same-sex couple eager to explore the new options available to you, or a heterosexual couple just now delving into some estate planning for your future, estate planning is an important and extremely nuanced aspect of asset management best left to professionals. Also, if you have wrongfully been charged a tax like Edith Windsor, see your attorney asap to get a refund!!!