Tax Benefit for Divorcing Same-Sex Married Couples if Defense of Marriage Act Found Invalid – Part II
By Vivian L. Holley, JD, MA, CFLS, MFT and Rebecca Lovell
On December 7, 2012, the Supreme Court of the United States decided to hear two cases challenging the federal Defense of Marriage Act (DOMA) and California laws that define marriage as a union between one man and one woman. Under the current federal law, same-sex couples who marry are treated differently than are opposite-sex married couples. Specifically, the lack of federal recognition of same-sex couple’s marriage prohibits these couples from receiving certain tax benefits even if they’re legally married under their state’s law. The federal case is a challenge of Section 3 of DOMA, which prevents same-sex marriages from being recognized on the federal level. If the Supreme Court finds this section of DOMA invalid, the federal government would then recognize same-sex marriages in states in which they are legal.
We highlighted the potential tax changes for same-sex married couples in our last post, based on Kathleen Pender’s commentary in the San Francisco Chronicle, including changes to income tax treatment, amending tax returns, health benefits, social security, and estate tax. Now we further discuss how recognition of same-sex marriage on the federal level may change tax implications for same-sex couples during a divorce.
Taxable Gains for Buy Outs
Currently when opposite-sex married couples divorce and divide their assets, the event is nontaxable. However, when same-sex married couples split, there is a possibility that one or both may have to pay taxes. For example, if a couple owns a house together but decide to end their relationship, it is possible that one party may “buy out” the other in order to keep the house. For a same-sex married couple the party receiving the buy out money could potentially be taxed if the profit exceeds $250,000. However, for opposite-sex married couples, this event of buying out has no tax implication. If DOMA is found invalid, both same- and opposite-sex married couples will be able to buy out their partner without triggering a taxable gain.
Additionally, spousal support or “alimony” payments have different tax implications for same- and opposite-sex married couples. Currently for opposite-sex married couples, the person who pays spousal support to the other may deduct that payment from his or her taxes. However, for same-sex married couples, spousal or partner support is not a tax deductible event on the federal level even if it is deductible in states which recognize same-sex marriages or domestic partnerships.
One of the harshest tax implications for same-sex couples occurs if the parties want to split their retirement accounts. For an opposite-sex married couple, a judge or a settlement may require that one party give a portion of their retirement account to the other, and that person can roll over that portion tax-free. Currently the same type of transfer between a same-sex married couple will likely trigger income taxes, or even a penalty.
If DOMA is overturned, same-sex married couples will be able to benefit from the tax laws that currently benefit only divorcing opposite-sex married couples. Until the Supreme Court comes to a decision regarding the validity of DOMA, or if they decide to uphold Section 3 of DOMA, same-sex married couples who divorce will still be subject to these negative tax implications.