Updated August 29, 2013
On June 26, 2013, the Supreme Court ruled that a key section of the Defense of Marriage Act (DOMA) was unconstitutional. This will allow at least some same sex couples to have the same tax benefits – and burdens – that opposite sex married couples enjoy. So what does that mean for IRAs?
Section 3 of DOMA defines marriage for purposes of administering federal law as the “legal union between one man and one woman as husband and wife.” A spouse is defined as “a person of the opposite sex who is a husband or wife.”
Edie Windsor challenged the law. Ms. Windsor was involved in a long term same sex relationship with Thea Spyer. Ms. Windsor and Ms. Spyer lived together in New York, and in 2007 they got married in Canada. Ms. Spyer died in 2009 and left her entire estate to Ms. Windsor. At the time of Ms. Spyer’s death, their marriage was recognized under New York law, but Section 3 of DOMA prevented recognition of their marriage under federal law. As a result of not being able to take advantage of the unlimited marital deduction allowed for spouses, Ms. Spyer’s estate owed a federal estate tax of over $363,000. Ms. Windsor paid the tax in her capacity as executor and then sued for a refund, alleging that Section 3 of DOMA was unconstitutional.
In a 5-4 decision authored by Justice Kennedy, who was joined by Justices Ginsberg, Breyer, Sotomayor, and Kagan, the Supreme Court held that Section 3 of DOMA was an unconstitutional deprivation of equal protection. The Supreme Court acknowledged that the regulation of marriage was by longstanding tradition considered to be within the authority of the separate states, and that federal law has generally deferred to state law policy decisions in the area of domestic relations. The Court found that DOMA treated married couples within the same state differently, and made unequal a subset of state sanctioned marriages in a wide range of areas including Social Security. The majority decision struck down Section 3 of DOMA as invalid, but its opinion and holding are limited to “lawful marriages.”
The tax and other effects of this decision are far reaching, but many questions remain unanswered. Section 2 of DOMA, which allows states to refuse recognition of same sex marriages performed under the laws of other jurisdictions, was not at issue in the Windsor case. New York law recognized the marriage of Ms. Windsor and Ms. Spyer, even though they were married in Canada. This means that at least for now states which have banned recognition of same sex marriage may continue to do so for state law purposes, regardless of whether or not a marriage is recognized under federal law. There is little doubt that this will lead to substantial confusion in many areas of law, which will take some time to sort out.
Update: On August 29, 2013, the IRS issued Revenue Ruling 2013-17, which addressed some of the issues that were still outstanding after the Windsor decision. The IRS clarified that:
For federal income tax purposes, the IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013 (the effective date of Rev. Rul. 2013-17), generally must file using a married filing separately or jointly filing status. For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.
Qualified retirement plans must comply with these rules as of Sept. 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many matters, this rule does not extend to matters relating to qualified retirement plans. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before Sept. 16, 2013. The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17.
A list of Frequently Asked Questions on Revenue Ruling 2013-17, including the above information and more, may be found at http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples.
For legally married same-sex couples, there are some implications for their IRAs, presumably including:
1) A spouse who does not work outside the home may now qualify to make a contribution based on their spouse’s income (a spousal IRA).
2) For a married couple filing jointly, their combined Modified Adjusted Gross Income (MAGI) may prevent each spouse from directly making a Roth IRA contribution or from deducting a traditional IRA contribution if at least one spouse is covered by a retirement plan at work and their MAGI is above certain income limits.
3) Upon death of an IRA owner, the surviving spouse may rollover or transfer the deceased spouse’s IRA to their own IRA.
4) If the IRA owner died before the year in which he or she reached age 70 ½, a spouse who is the sole beneficiary of the IRA can defer taking RMDs from the beneficiary IRA until the year in which the deceased spouse would have reached age 70 ½.
5) If the sole beneficiary of the IRA is a spouse who is 10 years or more younger than the IRA owner then the IRA owner may use the Joint Life and Last Survivor Expectancy Table (Table II) in IRS Publication 590 to calculate a lower Required Minimum Distribution (RMD) for those who are at least age 70 ½.
6) Retirement assets can be split tax free in a divorce.
7) In the case of an HSA, the account becomes the account of the surviving spouse and continues as an HSA as opposed to being distributed and taxed upon the death of the HSA account owner.
This blog post will be updated as the IRS issues further guidance on how the Windsor decision and Revenue Ruling 2013-17 impacts qualified retirement plans, IRAs, and other tax-favored arrangements.