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IRS Clarifies New Same-Sex Marriage Tax Issues

Image courtesy of Grant Cochrane / freedigitalphotos.net

As most of you are probably aware, the United States Supreme Court issued a landmark decision in June that struck down a portion of the Defense of Marriage Act (DOMA).

Constitutional Due Process Challenge

The case, United States vs. Windsor, was an estate tax case out of New York. Thea Spyer and Edith Windsor were legally married under New York state law, but the estate was unable to claim a marital deduction for property left to Windsor because, under DOMA, the definition of marriage for federal purposes was restricted to heterosexual unions.  Windsor argued that the law unconstitutionally violated due process because it singled out legally married same-sex couples for differential treatment compared to other similarly situated couples, without justification.

The Decision

In a 5-4 decision, the Supreme Court agreed. The holding allowed Windsor to claim the federal marital deduction for property passing to her, resulting in an estate tax refund of $363,053.  Under the ruling, similarly situated same-sex couples married in states that permit same-sex marriage became entitled to tax treatment and other benefits under federal law applicable to all spouses.

Unanswered Questions…

I held off on writing about this ruling because, while historic, the decision left open a host of important unanswered questions.  In particular, the following two major questions were left unanswered by Windsor:

  1. What if a same-sex couple is legally married in a state that permits same-sex marriage, but the couple subsequently moves to another state that does not recognize same-sex marriage?
  2. How does federal law treat same-sex couples who have entered into domestic partnerships or civil unions that define those arrangements as the equivalent of marriage for state law purposes (such as Illinois does for civil unions)?

Now Made Clearer

The IRS has now issued Revenue Ruling 2013-17 which provides new guidance that answers these questions (along with an FAQ).

“State of Celebration” Rule

As to the first question, the IRS has adopted the so-called “state of celebration” rule.  The rule provides that a same-sex couple that was legally married in a state (or foreign country) that recognized their marriage will be treated as married for all federal tax purposes, regardless of where the couple currently resides.  For example, a same-sex couple that was legally married in New York but later moved to Illinois (which does not currently allow same-sex marriage) will nonetheless be treated as married for all federal tax purposes.

Civil Unions Don’t Qualify

As to the second question, the ruling confirmed that the term “marriage” does not include those who have entered into domestic partnerships, civil unions and similar arrangements, regardless of how the couples’ home state defines or treats the relationship.  This is of keen importance to many Illinois residents.  Illinois adopted a new civil union law in 2011 which grants those in civil unions all of the legal rights and benefits afforded married spouses under Illinois state law.

Change Ahead for Illinois?

The Illinois civil union law was originally billed as a compromise equivalent to marriage for Illinois residents.  However, as a consequence of Windsor and the subsequent IRS guidance, we now know that this is not the case as the benefits do not extend to important federal tax treatment.  As a result, after failing to pass legislation earlier this year (but before the Windsor decision and subsequent IRS guidance) I would expect the Illinois legislature to renew a push to permit same-sex marriage in Illinois. Stay tuned.

Image courtesy of Grant Cochrane / freedigitalphotos.net