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June 09, 2016 In the Stacks

Legal Guidance for Same-Sex Couples Considering Marriage

By Patricia A. Cain, Professor of Law, Santa Clara University, Aliber Family Chair in Law, Emerita, University of Iowa

Whether to Wed: A Legal and Tax Guide for Gay and Lesbian Couples, by Scott E. Squillace, Paperback, $32.55 (December 15, 2013), ISBN-10: 098604900X; ISBN-13: 978-0986049002

Tax law became somewhat simplified for same-sex couples on June 26, 2013, the date of the Windsor opinion.1 It became even more simplified on June 26, 2015, the date of the Obergefell decision.2 Scott Squillace’s book, Whether to Wed, was published in the interim between Windsor and Obergefell, but the book continues to set forth important issues for same-sex couples to consider as they ponder whether or not to marry.  Of course, now that we live in a world of marriage equality going forward, the issues are pretty much the same for opposite-sex and same-sex couples.

The book is directed at lay couples, not lawyers. But for any lawyer who has LGBT3 clients it would be a useful read, especially for any lawyer who has not engaged with the many questions raised by same-sex couples after the Windsor decision. After Windsor, many practitioners in the LGBT community found themselves being asked for advice on the whether-to-wed question. In response to that question, I suggest offering the client a copy of this book. No one should make such an important decision on the basis of how tax law and other federal benefits apply to married couples. However, no one should marry without understanding the consequences of that decision. This book explains the most important consequences.

The first three chapters of the book present background information on the struggle by the LGBT community to gain the right to marry. These chapters include historical detail on the meaning of marriage as an institution, useful information on the LGBT community, and discussion of the widespread litigation efforts around the country that would eventually lead to the Obergefell decision, which would establish the right to marry for same-sex couples. The story of Edith Windsor and her spouse, Thea, is highlighted. Windsor’s battle against the IRS, claiming she was entitled to a marital deduction for her deceased spouse’s estate, resulted in the demise of federal discrimination against same-sex spouses. The Defense of Marriage Act (DOMA)4 enacted in 1996, eight years before same-sex marriage was legal anywhere in the United States, forbade the federal government from treating same-sex spouses as legally married. The Windsor Court ruled that such a ban violated the equality principle in the Fifth Amendment.

With DOMA gone, and with the IRS pronouncement5 that it would recognize all marriages validly entered into in a state that recognized the marriage no matter where the couple might reside, same-sex couples began considering the marriage question more seriously. Chapter Four then sets forth the various considerations at the federal level. Will the couple face a tax penalty or bonus by filing jointly?  It depends, of course, on how much each spouse earns. Squillace uses examples that can explain the effect of joint filing even to clients who might suffer from math anxiety.

The penalty, however, may come from things other than the rate structure. For example, one spouse might have been receiving tax-free social security benefits, but when her income is aggregated with that of her spouse, she may find herself over the income limit for the exclusion of such benefits.6 And Squillace also points out what so many have asked when faced with this taxation of social security dilemma. What if I just file separately? Ah, then, you cannot exclude any of your social security benefits.  Why? Because there are special rules for married people who file separately.

Squillace covers this married-filing-separately terrain in more detail. He lists all of the tax benefits one might lose if filing separately. He also identifies the key tax benefits of being married, including tax-free health care coverage provided by one spouse’s employer to the other spouse, the ability to exclude up to $500,000 of gain on the sale of a principal residence even if only one spouse is the owner,7 and the ability to shift the tax burden on alimony at divorce8 . In fact, just knowing for certain what the rules are for both alimony and property divisions at divorce is a huge benefit of the Windsor decision.

In addition to tax law, the book discusses other federal laws that are implicated by the recognition of a couple’s marriage, both going forward and retroactively for any issues that are still open. These include social security, ERISA, federal pension benefits, Veteran’s Benefits, immigration, and bankruptcy. The reader should be aware, however, that this book was written when there was ongoing debate about which federal agencies would recognize which marriages. For example, the Social Security Administration is bound by statute to recognize only those spouses who are domiciled in states that recognized their marriage.9 Post-Obergefell, of course, all states must recognize such marriages.

Chapter 5 addresses the pros and cons of marriage at the state level. At the time the book was written these pros and cons only existed for spouses who lived in recognition states. Today all of these state law considerations should be relevant in all states since all states must recognize same-sex marriages.

One key consideration is the existence of certain marital property rights. I do have one quibble here. Although Squillace correctly describes the effect of the community property regime on spouses, his description of the tax consequences is misleading. Yes, each spouse has to report 50% of the community income and claim 50% of the deductions, but that division is irrelevant if the couple is filing a joint tax return.

In addition, although he correctly identifies Nevada (a non-recognition state at the time the book was written) as a community property state that applies community property rules to registered partners, he fails to explain the problem that exists for such couples. It is a problem that existed before Windsor and it continues to exist. Registered partners in California, Nevada, and Washington are all subject to the state community property rules. But the IRS 2013 revenue ruling10 that established which marriages would count for federal tax purposes concluded that registered domestic partners (RDPs) and Civil Union Partners (CUPs) would not be treated as spouses. That has resulted in some strange tax consequences. Those states that do recognize such unions treat them the same as spouses, meaning that if there is a state income tax (e.g., California, but not Nevada or Washington) they must file as married. But when they file their federal returns, they must file as single.  The consequences are even stranger for RDPs in the community property states who are required to file as single at the federal level. Since the Service does recognize state property law, including community property rules, the Service will apply those rules to RDPs in the three community property states. That means that under Poe v. Seaborn11 all community income and deductions must be split 50/50.12

In Appendix A, which describes the marriage states, the Registered Domestic Partnership/Civil Union states, and the non-recognition states, I have another quibble. Since California and Washington were marriage equality states as of the writing of the book, the author identifies them as such and fails to discuss the possibility of partnership registration in those states. This shortcoming is mitigated by Appendix D which describes the relationship recognition history of all states and includes marriage recognition as well as alternatives to marriage, such as registered partnerships and civil unions.  Both Appendices are very useful in giving the marriage history of the first states to recognize same-sex marriage. They are also useful as historical descriptions of where the non-recognition states stood on the issue as of late 2013.

In fact, all of the appendices are valuable. What are the best web resources? See Appendix B. Are any of the terms used in this discussion not clear? See the Glossary in Appendix C. What is the relationship recognition timeline for each state—as of late 2013? See Appendix D.

And so, in sum, this book is a good source of information about the things that same-sex couples have had to ponder after Windsor and Obergefell. Even though the book was written before Obergefell, the points about whether or not to wed remain important considerations. For anyone contemplating marriage, and especially for same-sex couples who may not have thought about these issues before, this book provides a good overview of what every couple ought to know.

3 Lesbian, Gay, Bisexual, Transgender.

4 Pub. L. No. 104–199, 110 Stat. 2419 (Sept. 21, 1996), 1 USC § 7 and 28 USC § 1738C.

5 See Rev. Rul. 2013-17.

6 See IRC § 86.

7 See IRC § 121.

8 See IRC §§ 71, 215.

9 Note that spousal social security benefits are also extended to registered partners if the partner inherits a spousal share under state intestacy laws, which is the case for all partners who are treated as spousal equivalents and even for some partners who are accorded fewer rights but are granted intestacy rights. That is because the language in the Social Security Act treats as a spouse anyone who would inherit as a spouse under state intestacy law. See 42 USC § 416(h)(1)(A)(ii).

10 Rev. Rul. 2013-17.

11 282 US 101 (1930).

12 See CCA 201021050.