Tax Law: Marriage and Tax Equality, Separate but Equal?

The word “equality” has become a mainstay of media headlines over the past several weeks as the issue of same-sex marriage has reached the Supreme Court.

Like most compelling human interest stories, the financial ramifications of the legislation have mostly managed to miss the cut on the editing board. Many same-sex couples will find that “equality” comes with a price, especially if there is also equality between a couple’s respective paychecks.

That price comes in the form of higher taxes.

Couples with relatively equal incomes who file their taxes jointly face the potential of what is commonly referred to as the marriage penalty.  This happens because the total tax rate increases to a percentage level that the filers would have missed had they filed independently.

Many may consider this a trivial point in a much greater debate. However, United States v. Windsor, the Defense of Marriage Act case recently heard by the Supreme Court actually arose from a tax challenge. The case is one of the most paramount issues being considered by the justices.

Windsor and her partner married in 2007. While the marriage was recognized by her state, it was not recognized by the federal government. Her spouse then died and left her estate to Windsor. In her capacity as administrator of her spouse’s estate, Windsor was forced to pay $360,000 in federal estate taxes on the inheritance because she was not qualified for the marriage exemption under federal law.

Windsor would have owed no taxes if the government had recognized the union as a marriage as spouses are granted an exemption to the estate tax.

In addition to the estate tax exemption, same-sex couples are also currently excluded from other federal benefits given to heterosexual married couples such as Social Security and Medicare payments for spouses. All of that would change should the Supreme Court strike down the Defense of Marriage Act.

Higher income taxes could be a small price to pay in the minds of same-sex marriage advocates, but it emphasizes the complicated nature of government policy changes to marriage laws.

Current estimates suggest that an influx of same-sex joint filers would not necessarily be a big win for the IRS. Reports from the Congressional Budget Office suggest that same-sex marriage filings would likely be revenue neutral or raise insignificant revenue if the IRS began recognizing them.

Other reports suggested it actually represented a revenue loss for the Treasury long term. That’s because while the would be government would be potentially collecting more from joint filers, they would also be forced to provide same-sex couples new benefits.