Question: I am a partner in a same-sex marriage now residing in Illinois with my spouse. What actions, if any, should I take in light of the recent case treating same-sex marriages the same as conventional marriages?
Answer: The U.S. Supreme Court decision in Windsor v. U.S. opens the door to many new opportunities for same-sex couples. A couple must be legally married in a State which recognizes same-sex marriages to qualify for the benefits of the Internal Revenue Code offered to married couples. While the State of Illinois previously only recognized civil unions which were not treated as marriages, Illinois recently enacted legislation recognizing same-sex marriages. The Federal government has adopted a so-called “State of Celebration Rule” so that couples who marry in a State which recognizes same-sex marriages will be recognized as being married for Federal tax purposes regardless of which State they reside in. Because you were married in a State which recognizes same-sex marriages, you and your spouse will be treated as a married couple for Federal tax purposes regardless of which State you reside in.
While there are numerous aspects of Federal tax law which apply to same-sex couples, some of the areas which may be of most interest to you are highlighted below.
A surviving spouse in a same-sex marriage is now eligible to roll over the retirement plan assets (e.g., profit sharing funds, 401(k) assets, IRAs, etc.) of the deceased spouse to the surviving spouse’s retirement account on a tax-deferred basis. This can provide meaningful income tax savings for the surviving spouse. Qualified retirement plans generally require the plan participant’s spouse to be the designated beneficiary of the participant’s plan benefits and this rule will now apply to same-sex couples. The consent of a spouse in a same-sex marriage is required if the participant spouse wishes to name a beneficiary other than the surviving spouse. Same-sex spouses are now treated as spouses for retirement plan distribution purposes and may avail themselves of some of the more favorable distribution options from retirement plans. As a result of these changes, beneficiary designations of all retirement plan accounts should be carefully reviewed as many opportunities are now available to same-sex couples.
Income Tax Filing
Same-sex spouses are now entitled to file joint income tax returns for Federal purposes. For tax years for which the income tax Statute of Limitations has not run (generally three years), same-sex couples may amend previously filed income tax returns for years in which they were married. It is noteworthy that in many cases, dual wage earner spouses will pay more income taxes by filing jointly than they would if they were not married and filed as single. Following Windsor, same-sex couples will no longer have this option. The joint filing of State income returns will only be permitted in States which recognize same sex marriages.
As the Court ruled in Windsor, a deceased spouse in a same-sex marriage can, during lifetime or upon death, transfer assets to a same-sex spouse and no Federal estate or gift tax will be imposed on the transfer. The tax-free transfer of assets between spouses in a same-sex marriage represents an enormous opportunity and will likely require an update of Wills and Trusts currently in effect for same-sex couples. Same-sex couples can also elect to split gifts for Federal gift tax purposes, thereby enabling them to preserve their estate tax exemptions to a greater extent. Also, the provision of the new tax law allowing surviving spouses to use the unused estate tax exemption of the deceased spouse will now be available to same-sex spouses.
With the extensive provisions in the Internal Revenue Code which apply to spouses, a new array of tax planning opportunities is now available to individuals in same-sex marriages. Now is the time for same-sex couples to review the benefits available and take advantage of the new opportunities.
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