It is possible, that as you read this article we may well be waiting for the Supreme Court decision that will determine the legality of the Defense of Marriage Act (DOMA). DOMA, signed into law in 1996, closed the door to federal recognition of same sex marriage by defining marriage as a union between only a man and a woman. As a result, more than 1100 federal benefits provided to married heterosexual couples are denied to same sex married couples (SSMC). DOMA also suspends application of the Full Faith and Credit Clause as it relates to same sex marriage (SSM), the clause that protects the portability of marriage from state to state.
With Massachusetts being the first state in the country to legalize SSM, practitioners have now been addressing the tax issues for close to 8 years. We have navigated the different federal and state tax treatments and strategized best approaches. In order to provide the best tax service to our clients we must also become familiar with the legal, economic and emotional ramifications of DOMA on our SSMC’s, Domestic Partners (DP) and Lesbian, Gay, Bisexual & Transgender (LGBT) clients.
Because DOMA limits marriage portability, when SSMC’s travel out of Massachusetts they face inherent risks. For example, if medical care is required while visiting other states, a same sex spouse may be denied hospital visitation or the right to make medical decisions if their marriage is not recognized in that state. Our advice to SSMC’s is to always carry an executed health care proxy form when traveling. Additionally, when SSM clients move out of state, wills executed in Massachusetts may not be effective in another non SSM state.
Massachusetts state law assumes that children born into a marriage are the legal offspring of both the parents. In a SSM, that presumption should also hold, however, it remains unclear whether this presumption will stand if the couple moves out of state. Many SSMC’s will proceed with a second parent adoption to ensure the legality of both parents irrespective of where they reside. It also ensures the child will be eligible to inherit based on succession laws and receive any appropriate federal benefits (social security, disability, etc.).
Estate planning requires sophisticated integration; the lack of the unlimited marital deduction on a federal level hampers the usual planning techniques for married couples. For those SSMC’s that are divorcing, complex issues arise relative to property division and alimony payments. Not all states will agree as to jurisdiction in hearing a divorce case, and some have residency requirements.
For transgender persons there are a myriad of legal issues. Often there is inconsistency in a person’s gender identity and the court’s determination of their sex, and consequently the legal status of a transgender person’s marriage may be in question for federal purposes. Therefore, for transgender persons, the determination of gender is imperative in determining the legal status of marriage (as well as divorce). Some states do not recognize a change in biological sex regardless of surgery while others do, and marital status may be impacted by the state the client lives in. Some states prohibit amending birth certificates for gender reassignment others will do so with a court order. Questions may arise when a transgender person transitions to the same gender as their spouse and they are already married, it would appear against public policy to invalidate the marriage.
For our senior clients, DOMA has also resulted in an unreasonable and perhaps unfair application of Medicare regulations. At age 65, persons must elect either Medicare Part B for health insurance, maintain a policy through their own or spouse’s employer, or face a 10% penalty per year when insurance is eventually purchased. If a client has no available insurance of their own, but is covered by their same sex (SS) spouse's employer, this does not meet the Medicare exception to the penalty. Medicaid, a federally funded state run program, also poses challenges. It is unclear, even in Massachusetts how elder SSMC’s will fare under DOMA (Will the marriage, regardless of length, be recognized or not?). Planning for our aging community members is fraught with uncertainty and additional cost.
As we retain our clients and they move to other states we are also contending with differing state tax treatments. Those SSMC’s and DP’s moving to California are facing huge obstacles in tax preparation. The IRS announced in 2010 that SSMC’s and registered domestic partners who are California residents must prepare their returns (2010 and thereafter) based on community property rules. From a policy perspective, it appears a victory, a federal agency acknowledging the states authority to determine reportable amounts and division of income for tax purposes based on the state recognition of SSM. Unfortunately California CPA’s, not having the option to federally file SSMC jointly, must prepare returns where income is split between two spouses, the return filing status options being single or head of household (not married separate). With lots of worksheets to fill out and a new form for 2012 (8958), same sex taxpayers are paying dearly to have CPA’s and attorney’s interpret community property statutes in order to properly prepare the returns.
The economic effect of DOMA is most evident in the taxation of the imputed income for employer provided health care coverage of a same sex spouse when the spouse is not a dependent. The federal imputed income is generally calculated as either the difference between single and family coverage, or the cost of the premium for a single person. Pretax dollars cannot be used for the premium which subjects the imputed income to both federal income tax and employment taxes. Depending on the plan this adds a big price tag to the cost of insurance and has greater relevance now that we have a federal mandate that everyone be insured. In addition, many employers and SSMC’s are not aware that although the income is imputed for federal purposes, it is not considered income for state purposes. W-2’s should have a difference in taxable wages. We spend part of January each year assisting clients and employers correcting improperly prepared W-2s.
A recent article in the Boston Globe, section G, entitled “Home Front” highlighted the impact of DOMA on our SSM service people. Although the “Don’t Ask, Don’t Tell” policy, was repealed by Congress in December 2010, it sadly has taken until February 2013 to announce access to 24 generally non-financial benefits which are not even expected to be fully implemented and available until October of this year. Part of the benefits include hospital visitation, designation as a person of interest in status of a missing member, person eligible to receive effects of a deceased person, Wounded Warrior Designated Caregiver, etc. Although these are not economic in nature, they are significant in affirming the family.
Due to federal non-recognition of SSM, there is an inherent additional cost for SSMC in implementing sound financial plans because the traditional methods were designed for federally recognized marriage and we have to strategize alternatives for the difference between federal and state tax treatments. How do we formulate an effective estate plan for both federal and state purposes when questions remain about decisions how to maintain checking accounts, how the titling of account may not preserve deductions (joint or separate), structuring the titling of assets without triggering gifting issues, determining who is entitled to dependency deductions, and who should carry the health insurance for the family? Because of DOMA regulations we are at a loss to determine at what point gifting is occurring and how much dependent care benefits (DCAP) or flexible spending arrangements need to be accessed. The fundamental question of our clients continues to be: How can our financial plan ensure economic stability so that we can raise our children, send them to college, take care of our aging parents and hopefully retire one day? As we are providing service to our LGBT clients, we bear these issues in mind.
As tax preparers and financial advisers, we must develop clear policies and strategies for preserving the dignity of all of our clients. Approximately 40% of Gonzalez and Associates’ tax clients are either SSMC or domestic partners (DP). We believe that creating a relaxed atmosphere helps to generate trust and effective interactions and communication. Our client base has grown because of our familiarity with and holistic approach to providing financial services to diverse families. Because we convey the message that everyone's family and relationship should be affirmed and validated, our firm culture is experienced by all of our clients as being accepting and open. Male SSM clients feel comfortable introducing their husbands and female clients their wives. Over the years we have developed and provided for our clients a resource bank of professionals who are familiar with LGBT issues in their respective fields. Our firm specialty has generated more consultations for financial planning due to the education we provide our clients. The satisfaction we receive for empowering our clients is priceless.
It may well be an historic moment when the Supreme Court delivers its opinion, a moment that hopefully will bring equity, fairness and justice to the LGBT community. In the meantime, our advocacy and attention to the issues surrounding DOMA are imperative.
Written By:
Lillian Gonzalez, CPA, MST, CSEP, CSRP, ADPA
GONZALEZ & ASSOCIATES, P.C.
Certified Public Accountants
