In a legal landmark decision, the U.S. Supreme Court recently ruled that the Constitution guarantees a right to same-sex marriage (Obergefell v. Hodges). Previously, we blogged about changes to employee benefit plans, and trust and estate documents. Now, here’s a breakdown on some key state and federal tax implications.
Tax Law Changes
Although the Obergefell v. Hodges decision made only passing reference to tax implications, the wide-reaching social, political and economic ramifications inherent in this decision include a number of significant tax issues.
Pursuant to the United States Supreme Court decision in U.S. v. Windsor, in 2013, the IRS issued Rev. Rul. 2013-17, which provided that a same-sex couple that was legally married in a domestic or foreign jurisdiction that recognized their marriage would be treated as married for federal tax purposes, regardless of where they currently live. Further, it provided that lawfully married same-sex couples must file as married couples for federal income tax purposes.
State Income Tax Filings
In response to the Windsor decision and IRS Rev. Rul. 2013-17, many States, including Michigan, issued guidance that required same-sex couples married in other States to file separate State income tax returns, even if their filing status was married filing jointly for federal income tax purposes.
Prior to the Obergefell decision, Michigan required that each individual who has income attributable to Michigan and who has filed a joint return with the IRS as a same-sex couple separately report adjusted gross income (AGI) for Michigan income tax as a single filer. Further guidance then directs each individual to recalculate their federal AGI as if they had filed a single federal return. In essence requiring the preparation of “dummy” federal returns. The Obergefell decision essentially makes Windsor applicable for not only the federal returns but for all State tax returns, including Michigan. Thus, those in a same-sex marriage will be considered married for State and federal return purposes, eliminating the need for the preparation of “dummy” returns.
Also, prior to Obergefell, same-sex couples with filing obligations in more than one State continued to face the possibility that they would have to file as married in one State and as unmarried in another State. Obergefell has now alleviated these types of State tax law complexities.
Note, further, that married same-sex couples who were not allowed to file returns as married individuals in the State where they currently reside, may wish to consider whether it is advantageous to file an amended State tax return for open tax years.
Common Law Marriage
Another potential consequence of Obergefell deserves comment. Some States (not Michigan, however) recognize common law marriage. In common law marriage States, a couple that holds itself out as married is married for State law purposes, even without a marriage license or ceremony. It is possible that some same-sex couples whose relationships have heretofore not been recognized for State tax purposes are now married (and, since Obergefell is not prospective only, have been married) under these rules. If so, they are and have been married for both State and federal tax purposes as well.
Tax Treatment of Children
A further issue traditionally faced by same-sex couples was the issue of legal parentage of children for State and federal tax law purposes. Opposite-sex couples benefit from the irrebuttable presumption of parentage for all children born within the marriage. Same-sex couples in States that recognize same-sex marriage often do as well. Until Obergefell, same-sex couples in other States (such as Michigan) did not. This often meant that the non-birth parent had to undertake the expensive and burdensome process of adoption; approximately half of all States prohibited “second-parent” adoptions. This, in turn, could mean that a parent in a same-sex relationship might not be recognized as a child’s parent when the family relocated in another State. The federal tax law of parentage follows State law. Arguably, Obergefell, resolves this problem. If States must recognize same-sex marriage, “on the same terms and conditions as opposite-sex couples,” then States must recognize parents in such marriages as parents “on the same terms and conditions as opposite-sex couples.” Accordingly, children of same-sex parents should be treated as their children for State and federal tax purposes as well.
Real Estate Transfer Taxes
Finally, also consider the potential impact of Obergefell on transfers of real estate which have occurred between same-sex couples and any transfer taxes assessed or the uncapping of the value of the property for real estate tax purposes. The retroactive application of Obergefell may entitle same-sex spouses or survivors to refunds for past payments of these and other taxes.
It’s important to issue another reminder that the Supreme Court’s ruling in Obergefell v. Hodges will have wide-ranging implications across the country, though it may be a long process for state laws in Michigan to be changed to comport with the ruling. Each law will have to be carefully reviewed, new bills drafted, and legislation enacted.
Further questions regarding business and tax law should be directed to Fraser Trebilcock attorney Mark E. Kellogg. Mark chairs Fraser Trebilcock’s Business and Tax Law practice, and has devoted his nearly 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, and estate planning. In addition, Mark is a certified public accountant. He holds several leadership positions for legal organizations dealing with business, agriculture, estate, trust and probate law. He also currently serves on the Board of the international organization of Attorneys for Family-held Enterprises (afhe) and is President of the DeWitt Public Schools Board of Education. Contact Mark at 517.377.0890 or firstname.lastname@example.org.