High court's DOMA ruling: big tax savings for same-sex couples

The Supreme Court's decision to strike down the Defense of Marriage Act could save thousands of dollars in federal taxes for gay and lesbian couples. In 13 states, just the ability to file jointly would mean an extra $6,100 in tax deductions for same-sex couples.   

Same-sex couples can celebrate more than a civil rights victory with the demise of the Defense of Marriage Act. The Supreme Court’s decision to strike down DOMA, the federal law barring recognition of same-sex marriages, may save couples thousands of dollars a year and dramatically change how they navigate tax season.

Until today, DOMA prevented married same-sex couples from receiving more than 1,000 federal benefits heterosexual couples take for granted, according to the General Accounting Office. Those include the ability to file income taxes jointly, receive Social Security benefits after a spouse’s death, and avoid paying extra taxes on medical benefits. With so many restrictions placed upon them, same-sex couples have been treated as if they were in “marriages less respected than others,” the Supreme Court said in its ruling Wednesday.

Now, couples in 13 states that have legalized same-sex marriage, including California and New York, as well as Washington, D.C., could save time and pocket savings by jointly filing their income taxes. Joint filing, which combines a couple’s income for tax purposes, can bump a couple from one income bracket to another, allowing spouses to receive greater deductions on their taxes than couples who file separately.

Couples who will file their 2013 income taxes separately will be eligible to cut their income taxes by $6,100; couples filing jointly cut $12,200, according to the Internal Revenue Service. Many couples will immediately be able to benefit from joint filing by applying to recoup the extra taxes they paid since 2009 because of DOMA.

High-income gay and lesbian couples may see little gain, since they often pay less in taxes by continuing to file separately. However, many of those high-earning couples stand to see costly taxes on gifts and inheritances lifted.

Prior to DOMA’s end, only heterosexual couples were able to transfer an unlimited amount of money between spouses without being hit by federal gift and estate taxes. Same-sex couples were limited to transferring up to $5.25 million to spouses in a lifetime before having to pay a 40 percent tax on additional gifts.

For octogenarian Edith Windsor, DOMA meant she had to pay $363,053 in federal estate taxes after her wife died in 2009 and she inherited her estate.

“In the midst of my grief, I realized that the federal government was treating us as strangers,” Ms. Windsor said to a crowd of reporters at the Supreme Court after it heard the case in March.

With DOMA ruled unconstitutional and her marriage to her wife recognized by the federal government, Windsor will receive a refund. Additionally, in the event of a spouse's death, widows and widowers can now receive Social Security survivors benefits to help pay for funeral arrangements.

The Supreme Court’s decision could also potentially save same-sex couples money when they apply for health insurance.

Although an increasing number of companies have allowed same-sex couples to add a spouse to their health plan, such couples had to pay extra income taxes to do so – an expense that, according to the Center for American Progress, ran up to approximately $1,069 a year. Couples navigating the health insurance system will now be exempt from such taxes.

The expedited tax filings and added federal benefits will not apply to every same-sex married couple. Through constitutional amendments or statues, 36 states have banned same-sex marriage, meaning same-sex couples there are still not necessarily eligible for federal benefits, even if they were married elsewhere.

But institutions – especially banks – are already evolving to meet the needs of same-sex couples who still face hurdles when filing taxes, dividing their estates, or applying for health insurance. Morgan Stanley Smith Barney, Wells Fargo, UBS, and other Wall Street firms already have divisions that focus on gay and lesbian clients.

Such services are only likely to grow with the unraveling of DOMA, firms say.