U.S. Supreme Court Decision Has Tax Implications for Same-Sex Married Couples and Their Employers
On June 26, the U.S. Supreme Court issued another landmark decision on same-sex marriage. In Obergefell v. Hodges, the Court ruled that same-sex couples have a constitutional right to marry, making same-sex marriage legal in all 50 states. This 5-4 decision will affect tax and estate planning for many same-sex married couples and also impact their employers.
The decision expands the rights recognized in the Supreme Court’s previous landmark same-sex marriage decision, United States v. Windsor. That 2013 ruling essentially required the federal government to recognize same-sex marriage in states where it is legal.
The ruling was subsequently interpreted to also require the federal government to recognize same-sex marriage if couples got married in a jurisdiction recognizing same-sex marriage even if they resided in a state not recognizing it. As a result, generally same-sex married taxpayers have already been treated as married for federal tax purposes, thus being subject to both the pluses and minuses of such treatment.
But in Windsor, the Court did not go so far as to find that same-sex couples have a constitutional right to marry. At the time of the decision, this meant that the 30+ states that did not recognize same-sex marriage were not required to begin doing so.
However, between Windsor and the Court’s latest decision, same-sex marriage was legalized in many more states. Immediately before Obergefell v. Hodges, less than half as many states prohibited it as prohibited it before Windsor.
From a tax planning perspective, same-sex married couples in those states had to deal with the complications of being treated as married for federal tax purposes but not married for state tax purposes. In addition, to achieve their estate planning goals, they had to take into account the fact that their state did not recognize their marriage. For example, they had to implement additional strategies to ensure that assets would be distributed to the surviving spouse according to their wishes and, in some cases, to minimize state estate tax liability.
Employers will need to keep a close eye on how these developments will affect their tax obligations in relation to employees who have same-sex spouses.
It will take some time for all of the implications to emerge, but please let us know if you have any questions about how these changes may affect you or your business.