We have been receiving questions about how the new supreme court decision about gay marriage changes the typical tax return. Below is a detailed description of many different topics and what to think about during the tax year.

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Since the Supreme Court's 2013 Windsor decision (Sup. Ct. 2013)], same-sex couples, who are legally married under state or foreign laws, are treated as married for federal tax purposes just like any other married couple. The Supreme Court's Obergefell v. Hodges decision, (Sup. Ct. 6/26/15)] (issued in late June) now requires all states to license and recognize marriages between same-sex couples. Specifically, the decision states that same-sex couples can exercise the fundamental right to marry in all states, and that there is no lawful basis for a state to refuse to recognize a lawful same-sex marriage performed in another state.

This means that same-sex couples, who are legally married in any state, are now allowed to file joint state income tax returns wherever they reside. They are also entitled to the same inheritance and property rights and rules of intestate succession that apply other legally married couples. Therefore, same-sex couples should now be able to amend previously filed state income and inheritance tax returns for open years to reflect married status and claim refunds. Furthermore, these couples likely need to rethink their estate and gift tax plans.

Note: The ruling does not impact individuals in registered domestic partnerships, civil unions, or similar formal relationships recognized under state law, but not denominated as a marriage under the laws of that state. These individuals are still considered unmarried for federal and state purposes. However, these state-law "marriage substitutes" might be eliminated now that all states must allow same-sex marriages. Individuals in these relationships can now obtain marriage licenses, get married, and thereby qualify as married individuals for both state and federal tax purposes.

Here are some thoughts about the impact of Obergefell .

State Income Tax Implications of Obergefell

Since the Supreme Court's 2013 Windsor decision, members of same-sex married couples generally can and must file federal tax returns as married individuals (starting with the 2013 tax year, and for earlier years if the original return was filed after 9/15/13). However, members of married same-sex couples who live in states that did not previously recognize same-sex marriages had to file state income tax returns as unmarried individuals. This caused added complexity and expense in filing state returns. For example, some states that did not recognize same-sex marriages required affected individuals to prepare "dummy" federal returns showing unmarried status in order to reconcile the numbers reported on their state returns.

Obergefell essentially makes the Windsor decision applicable for state tax purposes, as well as for federal tax purposes. In other words, members of same-sex couples, who are legally married under the laws of any state, are now considered married for both state and federal income tax purposes, regardless of where they live. Going forward, this means that legally married same-sex couples will file state income returns just like any other legally married couple.

The exact mechanics on how states that don't already recognize same-sex marriages will handle this change for previously filed returns remains to be seen. However, married same-sex couples should evaluate whether it is advantageous to file amended returns for open years when they previously weren't allowed to file state income tax as married individuals. (As you know, filing joint returns is not always beneficial.)

Other state income tax implications of being married can include:

The decision to itemize deductions or claim the standard deduction for state income tax purposes.
Eligibility for various state income tax deductions and credits that were not previously available due to stricter income phase-out rules for unmarried individuals.

Impact on Estate, Trust, and Gift Taxes

Now that same-sex marriages are considered legal for both federal and state purposes, estate, trust, and gift tax benefits are available for all married same-sex spouses. Terms that previously applied only to married persons of the opposite sex or same-sex spouses legally married in jurisdictions that recognized such marriages now apply to all married persons, regardless of the couple's domicile or sexual orientation.

Expanded Eligibility. The estate, trust, and gift tax benefits now available to all married couples include the following:

Marital Deduction . If all requirements are met, spouses are entitled to claim the unlimited marital deduction for lifetime gifts or transfers at death. For states that impose a state estate or inheritance tax, most allow an exemption for bequests to spouses, which now includes a same-sex spouse. Although a marital deduction has been available to same-sex couples who were married in states that recognized the marriage for federal estate tax since 2013 (after the Supreme Court's ruling in Windsor ), the deduction is now available at the state level, too—even for the states who previously did not recognize the marriage as legal.
Portability Election. All same-sex spouses are now eligible to make the portability election to transfer the deceased spouse's unused estate tax exclusion to the surviving spouse. The surviving spouse can use the exemption carryover to reduce gift tax during life or estate tax for transfers at death. This election permits both spouses to maximize their estate exclusion amounts, regardless of who dies first. The portability election was discussed in TAM–1741.
QTIP Election . All same-sex spouses can now use a Qualified Terminable Interest Property (QTIP) trust election to qualify for the marital deduction. A QTIP election ensures that the deceased spouse's assets are available after his or her death to care for the surviving spouse, yet allows the decedent to determine who receives the property when the surviving spouse dies.
Elective Share Right. All same-sex surviving spouses can now claim his or her elective share of the deceased spouse's estate, regardless of the provisions of the deceased spouse's will.
Gift-splitting. Allsame-sex spouses, if both consent,can electto treat gifts made by one spouse as if they were made one-half by each spouse. With gift-splitting, the amount of the annual exclusion gifts (i.e., those not subject to gift tax) can be doubled. In 2015, if the gift-splitting election is consented by both spouses, annual exclusion gifts of up to $28,000 per donee can be made.
Qualified Domestic Trusts (QDOTs). All same-sex spouses can create a QDOT, which is a trust that can qualify for the marital deduction when the surviving spouse is not a U.S. citizen.

Potential Drawbacks. Although most of the expanded estate, trust, and gift tax implications for same-sex marriages are positive, a few drawbacks apply in these situations, including the following:

Transfers to Grantor Retained Income Trusts (GRITs) . A GRIT is created by a grantor by placing property in trust for the benefit of a remainder beneficiary, while retaining the income from the trust assets for the grantor's life or a term of years. This has the potential to save transfer taxes on property that is likely to appreciate. Unfortunately, GRITs can't be used in family transfers. Because same-sex spouses are now considered family members in all jurisdictions, this planning opportunity is no longer available to them.
Transfers or Sales by Qualified Personal Residence Trusts (QPRTs) . A QPRT is an irrevocable trust created by the grantor to hold his or her residence for a specified period, after which the residence is transferred to the remainder beneficiaries (usually his or her children). If the grantor is likely to be subject to estate tax, transferring a home to a QPRT, rather than an outright gift during his or her life or a transfer at death, can save significant transfer taxes. To qualify as a QPRT, the trust must meet certain requirements, one of which is that the trust cannot sell or transfer the residence, directly or indirectly, to the grantor or the grantor's spouse during the retained term of the trust, or at any time after the retained term interest that the trust is a grantor trust. Here again, because a same-sex spouse is now considered the grantor's spouse in all jurisdictions, a sale of the residence by the trust to a same-sex spouse is no longer allowed.

Taking Advantage of Benefits Not Previously Allowed. Now that the estate, trust, and gift tax benefits are available to all married same-sex couples, those who were not considered legally married before the Supreme Court's ruling in Obergefell should be able to claim them. For example, the executor of a deceased same-sex spouse's estate should consider making the portability election by filing an estate tax return (even if not otherwise required to file because the filing threshold is not met). The opportunity to take advantage of these benefits should be incorporated into the couple's planning by updating their estate documents. Certain trusts that were created for the same-sex couple may no longer be necessary, including Irrevocable Life Insurance Trusts (ILITs) set up to cover federal and/or state death taxes that may no longer apply due to the marital deduction or the portability election.

Married same-sex couples may wish to amend their previously filed federal and state estate and gift tax returns (assuming the statute of limitations has not expired) to claim benefits for which they were previously not eligible. For example, if the deceased spouse made gifts during his or her lifetime or at death to a same-sex surviving spouse, there may be an opportunity to file an amended gift or estate tax return to claim the unlimited marital deduction. This could potentially reduce the amount of applicable exclusion that was used and may result in a refund of any gift or estate tax paid. Or, if one spouse made a large gift (one that exceeded the annual exclusion amount, which for 2015 is $14,000) to someone other than his or her spouse, the married same-sex couple may choose to amend prior gift tax returns to take advantage of the gift-splitting election.

Nontax Implications of Obergefell

In Obergefell , the Supreme Court noted that other implications of an individual's marital status include spousal privilege in the law of evidence; hospital access; medical decision making authority; adoption rights; the rights and benefits of survivors; birth and death certificates; professional ethics rules; campaign finance restrictions; workers' compensation benefits; health insurance; and child custody, support, and visitation rights.

Obergefell also impacts social security benefits. Prior to the Obergefell decision, a same-sex couple that was married in one state and resided in another state that did not recognize same-sex marriage was not be able to receive social security spousal and survivor benefits because the place of residence of the same-sex spouses was controlling for social security benefits. Consequently, same-sex couples that were legally married in one location but moved to another where the marriage would not be recognized were not eligible for spousal and survivor social security benefits as a couple.

Because of the decision in Obergefell, same-sex couples are eligible for spousal and survivor social security benefits, regardless of the state in which they reside. Whether this change will be retroactive is not certain. Practitioners should be alert to further guidance from the Social Security Administration about the possibility to claim benefits retroactively for a same-sex couple who was already married but couldn't claim social security spousal or survivor benefits because their state of residence didn't recognize the marriage until after the Obergefell decision.

Conclusion

Since the Supreme Court's 2013 Windsor decision, same-sex couples lawfully married under state law have been recognized as married for federal tax purposes regardless of where they live. However, not all states allowed for or recognized marriages of same-sex couples. In Obergefell, the Supreme Court puts this issue to rest—all states must license and recognize marriages between same-sex couples. All that is left now is the states and other government agencies to provide the details on how they will implement this decision, especially with regards to its retroactive impact. Going forward it's pretty easy. A legally married couple is a legally married couple—period. Legally married same-sex couples probably need to revise their estate plans to account for this change.