Ruling poses tax issues for same-sex couples

TaxWatch

July 10, 2012|Eva Rosenberg, MarketWatch

LOS ANGELES (MarketWatch)—In June, the U.S. District Court in New York handed Edith S. Windsor a victory worth more than $363,000.
In a bold and dramatic move, U.S. District Court Judge Barbara S. Jones ruled that the Defense of Marriage Act is unconstitutional.
That wasn’t just a social statement. It heralds a powerful change in tax procedure, as well. On the basis of that ruling, all legally performed marriages, even those between same-sex couples, are entitled to the same tax treatment under federal law.
The verdict is being appealed by the Bipartisan Legal Advisory Group of the U.S. House of Representatives. Expect this case to reach the Supreme Court before the issues are resolved.

Meanwhile, the IRS was instructed to refund to Edith Windsor the estate taxes paid on behalf of the estate of Thea Spyer, Windsor’s wife.
California attorney and enrolled agent Mel Kreger says that this verdict opens up exciting tax opportunities for same-sex couples and domestic partners. It’s time to file protective claims to protect the right to tax refunds.
First, a little background. Several states allow same-sex marriage or recognize marriages performed in other states or countries. Some states also recognize registered domestic partnership arrangements for tax or legal purposes. Therefore, same-sex couples may be able to file joint tax returns in those states.
The federal government doesn’t recognize these marriages. For IRS purposes, same-sex couples must file as if they are not married. Each spouse files a tax return as single or head of household, depending on a variety of issues. IRS made concessions for same-sex couples in community property states, in deference to state property laws. Read more here on IRS.gov.
Estate taxes Estates taxes ranged from 45% to 55% in the past decade, plus state taxes. Suppose you could avoid those taxes?
Federal law allows for a marital deduction from estate taxes. All property included in the gross estate that passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.”
Having won their case in U.S. District Court, attorney Richard J. Bronstein, co-chair of the tax department of the New York firm of Paul, Weiss, Rifkind, Wharton & Garrison plans to file a state claim for refund of estate taxes paid. The New York Department of Taxation and Finance will probably not issue a refund. But this filing will protect Windsor’s right to her refund when the dust settles.
Consider a ‘protective claim’ Generally, for federal tax purposes, a taxpayer may request a refund of taxes paid if he files a claim for the refund by one of two dates, whichever is later: within three years of filing the tax return or amended return, or within two years of having paid the tax (or having had it garnished or levied by the IRS). States may have a different time frame.