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Tax Implications of the Defeat of the Defense of Marriage Act

          The Defense of Marriage Act (“DOMA”) passed in 1996 and signed into law by President Clinton, caused specific Federal income and estate tax consequences for same-sex couples who were married in states which recognized their marriages.  At the income tax level, these couples were able to file a joint tax return at the state level but they were treated as single individuals for Federal tax purposes.  In many cases, the two individuals, both treated as single, may have paid a greater combined Federal tax liability than if they had been able to file using the beneficial married filing joint Federal tax status.  However, this was not a detriment that was felt across the board, as some married couples pay a larger Federal tax liability when they are married compared to what their combined tax liability would be had they both stayed single.  This is known as the marriage penalty, and each couple’s composition of income and deductions affects the outcome of their calculated tax liability.  

          On an estate tax level, a married same-sex couple was not treated as married for Federal tax purposes, and therefore was not able to claim a martial estate tax deduction that deferred estate taxes until the surviving spouse’s death.  It was this aspect of the law that would eventually bring down Section 3 of DOMA, which defined a marriage as being between a man and a woman.

          Edith Windsor was married to Thea Speyer in Canada in 2007, after a 43 year relationship in which they were registered as domestic partners in New York.  Thea Speyer died in 2009 and left her estate to Edith Windsor.  Since Edith was not able to claim the marital deduction, she was forced to pay $363,053 in Federal estate taxes.  After paying the tax, she filed for a refund and challenged the Defense of Marriage Act by suing the United States. 

          After the U.S. District Court for the Southern District of New York and the Second Circuit Court of Appeals both ruled in Windsor’s favor, the case was heard by the U.S. Supreme Court.  On June 26, 2013, the Supreme Court of the United States ruled, in a 5-4 vote, that Section 3 of the Defense of Marriage Act was unconstitutional and that the Federal government, including the IRS, could not discriminate against married same-sex couples for the purposes of determining federal benefits and protections.  

          Do you know a same-sex couple that this historic ruling may affect?  If yes, there are many opportunities and planning considerations available to them that we have the expertise to assist with.  Married same-sex couples who have historically paid more tax as two single individuals are eligible to file amended tax returns for any years open under the statute of limitations and file using the married filing joint status.  In the cases of these individuals, they will receive a Federal tax refund for the excess taxes paid.

          Other matters for consideration may include:

                  * Reviewing Federal income tax withholding levels to determine their appropriateness under the new law
                  * Reviewing their joint tax situation to understand if they will be subject to the marriage penalty and pay                
                     additional  Federal  taxes  now  that their marriage is federally recognized
                  * Reviewing their wills and estate plans to determine appropriateness and changes that may be warranted under the new law

Strategies to Teach Your Children To Save

          We have heard it before.  The majority of today’s young generation are not saving enough money for their future and for their retirement.  We have compiled some easy methods that may be effective ways to encourage these young spenders to become savers.

Teaching Toddlers About Savings and Interest

          A toddler is going to see their parents use money to buy various items and pay for services, and will quickly pick up on the importance of money in life.  At this time, they should have a piggy back to begin saving money, whether it is putting away a portion of gifts or their allowance.  At a set, regular time, whether it is the last day of the month or the last day of the year, they should count the money they have accumulated in their piggy bank and be rewarded with a bonus of a percentage of the accumulated amount (for example, five percent).  The child will learn the basic concept of interest income and understand that saving more will lead to more interest earnings.

A Teenager Can Open A Roth IRA

Does your teenager have a summer job this year?  If yes, their wages are considered earned income, which qualifies them to open a Roth IRA or make a contribution to an account that already exists.  Teenagers and young adults may not understand the value of contributing to their Roth IRA in the early years of their working lives.  A parent or grandparent can encourage them to contribute a percentage of their earnings to a Roth IRA, for example, ten percent, by matching that contribution. 

An individual is allowed to contribute the lesser of $5,500 or their taxable compensation in 2013.  If your teenager is working at a summer camp and earns $4,000, they are able to contribute up to $4,000.  The money that they contribute, depending on their age, may have forty, fifty, or more years to grow and is able to be withdrawn tax free after age 59 ½ . 


Young Adults and 401(k) Contributions

Your son or daughter just started their first job.  If they are lucky enough to be eligible to contribute to their employer’s 401(k) plan, they may brush off the suggestion that they contribute any of their entry level salary to the plan.  However, the most important money that they save for retirement is this early money.  This money is given decades to grow and accumulate tax-deferred.  Parents can use the same techniques that they may use to encourage a teenager working a summer job to save and encourage their young adults to save money for retirement by matching their 401(k) contributions.  While an entry level salary may not enable the young adult to make a maximum 401(k) contribution of $17,500, the individual should be able to contribute 10% of their salary each year and increase that for annual pay raises. 

If you have questions about any of the topics discussed in this newsletter, please feel free to call us.  Remember, We’re Here For You.