New Definition of 'Marriage' Creates Clash Between Federal, State Tax Laws
On June 26, 2013, the U.S. Supreme Court struck down part of the Federal Defense of Marriage Act ("DOMA"). Specifically, the Supreme Court struck down DOMA's definition of "marriage" as being limited to a union between one man and one woman. As a result of the Court's decision, state law is now relied on to define "marriage" for purposes of federal and state laws, including tax laws. Therefore, same-sex couples who were legally married in a state that recognizes same-sex marriages are now subject to the federal tax laws for married couples and the generally favorable tax rules for married tax filers.
In response to the Supreme Court's decision, the Internal Revenue Service recently issued Revenue Ruling 2013-17, which provides that same-sex couples, legally married in states that recognize their marriage, are treated as married for federal tax purposes-even if the same-sex couples now live in states that do not recognize same-sex marriages. Thus, a same-sex couple legally married in another state now residing in Pennsylvania (a state that does not recognize same-sex marriage) can now file joint federal income tax returns to take advantage of increased deductions and credits as well as lower tax rates. Since Pennsylvania law does not recognize same-sex marriages, the couple would have to file as unmarried taxpayers for Pennsylvania income tax purposes.
As a result of the new federal position, legally married same-sex couples are now also entitled to a number of the favorable rules for married couples under federal gift and estate tax rules. Under federal law, each taxpayer is entitled to exclude up to $5.25 million of transfers from federal gift and estate taxes. This exclusion is above and beyond the marital deduction that permits unlimited transfers to a spouse (during life or at death) free of federal gift and estate tax. In addition, federal estate tax rules provide that a spouse's unused exclusion ($5.25 million of free transfers) can be transferred to the surviving spouse. This allows the surviving spouse to possibly transfer up to $10.5 million from federal gift and estate tax (both spouses' $5.25 million exclusion). As a result of the federal government's new interpretation of "marriage", legally married same-sex couples have the ability to use these powerful tools to reduce or eliminate their federal gift and estate tax.
Pennsylvania's DOMA Statute
While the federal government expanded the definition of "marriage" to include same-sex couples, the federal position on "marriage" does not control for state law purposes. Pennsylvania has a DOMA statute and under it, "marriage" is currently limited to only a union between a man and a woman. As such, Pennsylvania law, including Pennsylvania tax law, does not recognize same-sex marriages. This difference is evident on transfers on death. Pennsylvania's tax on death is known as the Pennsylvania inheritance tax ("PIT"). The PIT tax rate is based on the beneficiary's relationship with the decedent. For transfers to a surviving spouse, the PIT tax rate is zero percent. However, for transfers from a decedent to someone who is not a spouse, the tax rate varies from 4.5 percent to 15 percent. The PIT rate for a beneficiary not related to the decedent is the highest 15-percent rate. Since Pennsylvania currently does not recognize same-sex marriages, any transfer at the death of a legally married same-sex couple domiciled in Pennsylvania to a surviving spouse will be subject to the highest PIT tax rate.
This disparity between the federal taxes and Pennsylvania taxes for same-sex couples and opposite-sex couples will continue as long as Pennsylvania's DOMA remains unchanged.
To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.