The I.R.S. Makes Same-Sex Divorce A Bit Easier – for Some Couples

The IRS recently issued the guidelines we have been waiting for since the U.S. Supreme Court invalidated the Defense of Marriage Act.  The tax rules affect all married same-sex couples – while their relationship is intact, but also when things go asunder.  For those in intact marriages, some of the couples will enjoy benefits, whereas others will face higher taxes, due to the “marriage penalty.”

But as those who have been through a divorce recently have learned, one of the ironic burdens of DOMA was the lack of the tax protections that straight couples have always received upon divorce.  The “benefits” came in the form of being able to transfer assets and pay (and receive!) alimony without having to pay tax on those transfers.  The burden of double taxation was especially unfair, since these spouses had already paid their full share of taxes when the money was earned.   Now, thanks to the demise of DOMA, same-sex divorcing couples will enjoy the same freedom to transfer assets that straight divorcees have always had.  Splitting up a bank account, transfering ownership of a house, or paying spousal support (aka alimony or maintenance) can all be done in whatever arrangement the couple agrees to, without worrying about having to pay additional taxes on these payments.

Once DOMA was invalidated we knew that same-sex married spouses in recognition states would be exempt from taxation on these transfers.  However, there were two classes of couples whose fate was uncertain: those living in non-recognition states, and those who have marriage equivalent registrations, such as domestic partnerships (in CA) or civil union (in New Jersey).    The IRS said yes to the coverage for those in non-recognition states, but said no when it comes to those in marriage-equivalent registrations.

Here’s what this means.  If you are living in a non-recognition state (i.e. a state that doesn’t honor your marriage) and you are breaking up, and you are dividing up assets or helping each other out financially, you won’t owe any federal taxes.  Thus, even if your state doesn’t recognize your marriage, and even if you have to travel to another state to get divorced, at least the federal tax authorities won’t burden you with additional taxes.

But for marriage-equivalent registrants, there are still tax problems.  Under state law you may have to pay alimony or give some of your investment account to your ex – because those are some of the duties of being in a marriage-equivalent partnership.  But because the feds don’t recognize you as “spouses” you don’t the spousal tax privileges.  You will be faced with the same tax burdens – and tax uncertainties – that those in same-sex partnerships have faced for the past eight years.

We think this is unfair.  If the state considers you married, then the feds should fully recognize that status – even if it is called domestic partnership or civil union in your state.  Eventually, this problem will go away – in part because many of the states that now offer marriage are “upgrading” the registered partners into marriage.  Also, if your relationship is still intact, and you are worried about future tax problems, you can get married now – and then if you later divorce you will have all the tax protections as a divorcing spouse.  And finally, there are legal advocates working to persuade the IRS to loosen up these rules, and include divorcing domestic partners or civil union registrants into the scope of the tax exemption.

This is definitely complicated – and if you are going through a break-up and significant assets are involved, we urge you to consult with a tax expert who knows the rules for your particular state.

The Impact of the Supreme Court’s Big Decisions

Yesterday the United States Supreme Court removed the most important barrier to marriage equality in this country: invalidating that section of the Defense of Marriage Act which prevented the federal government from recognizing valid same-sex marriages.  In a sweeping decision that honored the liberty and equal protection rights of lesbians and gay men, the Court ruled that when a couple has a valid state marriage, the federal government must extend all of its benefits to that couple.  For many couples the federal benefits are the most important aspects of being married – including the immigration protections for bi-national couples, the Social Security benefits upon divorce or death, and the federal tax exemptions afforded to married spouses.  This ruling also clears the way for same-sex couples to transfer assets tax-free upon marriage or divorce, including retirement accounts, and provides insurance and other benefits for the spouses of federal employees.  It’s a momentous change for our community, extending the legitimacy, protection and respect from the federal government that we have long deserved.  And perhaps on a most symbolic level, it removes the scourge of a bigoted law passed in 1996, without having to endure a congressional repeal fight.  

The Court also rejected the appeal of the decision invalidating Proposition 8, which banned same-sex couples from marrying in California.  While the Court dodged a substantive ruling and relied on the appellant’s lack of legal standing to toss out the appeal, the end result is that marriages will resume in California within a month or so.  

There are still two important areas of uncertainty for many couples, however.  There are tens of thousands of couples in a marriage-equivalent partnership, either domestic partnership or civil union, in eight states, and we don’t know which (if any) of the federal benefits will be extended to those couples. Each federal benefit has its own legal framework, and it may take several years to work out these details.  If having a federal benefits is crucial for you, it may be advisable to get married, even if you are already state-registered.  That way you don’t have to worry about being a test case!  

The other area of great uncertainty involves couples that have a valid marriage, but live in a state that doesn’t recognize their marriage.  The Court’s decision on DOMA only dealt with the situation where the couple’s marriage was recognized by their home state, and it didn’t address the fate of couples living in non-recognition states.  Most federal laws look to the state of residence, not where the marriage was entered into.  Thus, if you live in a non-recognition state you will need to inquire as to the particular rules applicable for the benefit you are seeking.  If receiving the benefit is crucial and you don’t want to wait out the legal fight that will ensue over this issue, you may need to relocate to a recognition state.

One hopes that the strong language of the Court’s decision on the DOMA appeal, as well as the emerging social acceptance of marriage for same-sex couples, will lead to the repeal or invalidation of the DOMA laws in existence in more than 30 states.   This will eliminate the problems that exist for couples in those states, and will ensure marriage equality for all couples, wherever they reside.

One last word — remember that the right to marry is not the duty to marry.  Each couple needs to make their own decisions about whether marriage is right for them, legally, financially, and emotionally.  Marriage includes significant financial obligations, for shared debts, shared assets, and possible spousal support upon dissolution.  It also requires a judicial dissolution if things don’t work out, which can be difficult and expensive.  We all should celebrate the legal and political victories of this wonderful day – but don’t let the euphoria obscure the more complicated personal questions about what is best for you and your partner!