Tax Headaches for Same Sex Couples On June 24, 2011, New York State passed the Marriage Equality Act, becoming the sixth state to allow same-sex marriages. Same-sex couples will now be able to enjoy the same legal rights and financial benefits enjoyed by heterosexual married couples. But, there is a catch; these benefits and rights are only available in New York. The Defense of Marriage Act (DOMA), which is a federal law, continues to disregard same-sex marriages and denies all federal rights and benefits to the same-sex spouse. Once married, the same-sex spouse will enjoy certain rights in New York such as inheriting their spouse’s assets, if the decedent died intestate, free of New York State estate tax. The surviving spouse with children is entitled to inherit $50,000 and half of the remainder of the intestate estate. It is unclear as to whether New York will allow a Qualified Terminable Interest Property (QTIP) election for New York State Estate Tax purposes since New York follows the Federal Form 706, and allows the QTIP election if it was granted on the federal return. The DOMA recognizes only marriage between one man and one woman, which denies the marital deduction for transfers of property between same-sex spouses, both during life and after death. This also includes the ability to split lifetime gift transfers. This will result in higher estate and gift taxes to be paid by the same-sex couples, as before the passage of the new state law. For income tax filing, a same-sex couple is allowed to file jointly in New York, but for federal purposes they are required to file as single with separate returns. This may result in higher tax preparation fees for preparing a proforma joint return that will be necessary in order to complete the jointly filed New York State return. It will also be extra work for the CPA to determine if the couple is saving tax dollars by electing to file jointly in the state. With a lesbian couple, where one spouse has given birth, the other spouse’s name is automatically placed on the birth certificate, even though she is not the biological parent. For male same-sex couples, the issue is more complicated. If the male same-sex couple decides to use a surrogate to give birth to their child, only the biological father can have his name be placed on the birth certificate. The non-biological father can then adopt, but only if the surrogate mother relinquishes her parental rights to the child. It is still important that the proper beneficiary designations exist on life insurance policies, pension plans and IRA accounts during the adoption process as the child of a parent who is not the biological parent does not have the same rights to Social Security benefits, health insurance benefits and wrongful death claims. Employers should now review their existing benefit plans to assess the current rights for same-sex couples and for domestic partners. Some employers may decide that they will only offer health insurance coverage to couples who are married, and will no longer cover domestic partners. This will force both homosexual and heterosexual couples to marry in order to obtain benefits. Although it seems that many rights were won by the homosexual community in New York, planning will be more complicated. Domestic partnership agreements will now be replaced by pre-nuptial agreements for the State, but other planning techniques must be used to reduce taxes on the Federal side or for the other 44 states. Stringer NYSSCPA July 2011 Vol 2 #7. Another Canary On August 1, 2011 Central Falls, Rhode Island declared bankruptcy because its high labor costs impaired its ability to pay its bills. Their financial problems are not different from many states and municipalities. Inflexible and costly collective bargaining agreements have driven up its labor costs and crowded out services. The city runs a $5,000,000 structural deficit on a $16,000,000 budget. Its pension and retiree health care liability add up to $80,000,000. Police and firemen contribute a mere 7% of their salaries to pensions and can retire after 20 years with pensions equal to 50% of their final year’s salary. In the last year, Rhode Island appointed two receivers to try and bring the city back from the dead. The city’s first receiver raised real estate and personal property taxes by more than 20%, which had the effect of driving residents out of town. The second receiver asked the unions for concessions and came away empty handed; then he shut down the city library and community center. In a last ditch effort, the receiver asked the retirees to accept scaled back pensions and to contribute more to their health benefits. The retirees overwhelmingly voted no. Wall Street Journal 8/5/11 p. A11. This is Greece without the riots! Next up, Birmingham Alabama. As always, if you have any questions about these or any other matters, do not hesitate to call us. Remember, We’re Here For You!