Supreme Court to Hear DOMA Case on March 27th: Same-Sex Married Couples Able to File Jointly in 2013?

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The time has finally come. On March 27th, the Supreme Court will hear a case challenging the constitutionality of DOMA. Many have come forward over the last year in support of overturning the Act. Support has ranged from progressive LGBT rights advocates to President Barack Obama himself. Most recently Bill Clinton, the man who signed DOMA into law in the first place, has come forward.

When I signed the bill, I included a statement with the admonition that “enactment of this legislation should not, despite the fierce and at times divisive rhetoric surrounding it, be understood to provide an excuse for discrimination.” Reading those words today, I know now that, even worse than providing an excuse for discrimination, the law is itself discriminatory. It should be overturned.

So, what if it is overturned? How would such a decision impact same-sex married couples’ tax position and how long will it take for those changes to take place? Frankly, I expect the implementation be slow and burdensome. The IRS made a small change for a small portion of same-sex coupled taxpayers three years ago and we still don’t have official rules.

Not only will it take time for Congress to amend laws and regulations, it will take the IRS time to amend tax forms and procedural guidelines.  Furthermore, if spouse is no longer defined to only include opposite sex partners but applies to all couples who have a valid marriage, how will “valid marriage” be defined and how will the IRS know who has one? The easy answer would be any couple married in a legal marriage state. Only it’s not that simple, is it?  Many couples hold marriage licenses from legal marriage states but live in states without same-sex marriage. The issue is further convoluted when considering the varying recognition laws in each state.

I can only hope that the fall of DOMA will lead to blanket legal marriage across all states. Until then, I truly don’t understand how the IRS will determine which couples have the right to file jointly and I fear that they are no better prepared for such a change than they were for community property income splitting. I suppose the upside of this is that the delay in implementation will provide same-sex married couple taxpayers ample time for tax planning.

Just as it is with community property income splitting, the change will benefit some taxpayers and harm others.  For those of you that will not see a tax benefit from joint filing it may behoove you to start planning now. For those that will benefit, the question of amended returns arises. If DOMA is ruled unconstitutional it means it was always unconstitutional. To me, this suggests the right to amend prior year returns with married filing jointly status in order to cash in on the refunds you should have already received.

Only time will tell how this will all unfold, but my fingers are crossed.  I am grateful to witness and be part of such inspiring and historic accomplishments in equal rights.

National Taxpayer Advocate Urges the IRS to Issue Guidance to Domestic Partners and Same-Sex Married Couples

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The National Taxpayer Advocate Center is an office within the IRS designed to aid taxpayers in resolving their tax issues. They share responsibility with the IRS for evaluating systems and procedures. Each year the Taxpayer Advocate issues an annual report to Congress in which they make recommendations for improvements and identify systematic deficiencies.

The 2012 Annual Report submitted to Congress once again contained a request that the IRS provide authoritative guidance to domestic partners (DP) and same-sex couples (SSC). They have made this request each year since 2010 when new filing requirements were first implemented for DPs and SSCs living in community property states (CA, WA and NV).

To date, the only guidance the IRS has provided is an FAQ page that is periodically updated. The FAQ page is sadly insufficient however.  It excludes several issues that many DPs and SSCs face. Additionally, since the FAQ page is not authoritative it leaves over a million taxpayers in the position of being required to follow procedures to which there are little to no official rules. These taxpayers are thus forced to attempt to interpret the requirements on their own, or seek professional help from a tax advisor.

Each year the IRS has responded to the National Taxpayer Advocate Center with a claim that issuing guidance would be premature.  Their reasoning is that the political landscape surrounding DPs and SSCs is changing too rapidly and it would affect an “insignificant” number of taxpayers. While I do understand that until the Supreme Court rules DOMA unconstitutional the IRS’ rule making abilities are limited, I find it highly offensive to disregard the needs of over a million taxpayers because they are deemed “insignificant.” Meanwhile, the IRS has delayed tax return processing for the majority of Americans because of disputes on legislation that affects the small amount of taxpayers earning over $400,000/year.

The Taxpayer Advocate report also noted that data from the 2010 Census revealed an increase of documented DPs and SSCs of 100%. Since then, over five states have enacted legislation enabling Domestic Partnerships and/or Same-Sex marriages.  How many couples must there be before the IRS will help taxpayers? How many times must the Taxpayer Advocate urge Congress to enable the IRS to establish and implement authoritative guidance? Despite its apparent lack of effectiveness, it’s nice to know that someone is speaking up for DPs and SSCs. Thanks Taxpayer Advocate.

Estate Planning for the LGBT Community – Why You Really Need to Do it

I have the privilege of practicing law in Washington State, which, as you are no doubt aware, recently joined the ranks of States recognizing gay marriage. I cannot overstate how proud everyone that worked to achieve this goal is, and rightly so, but this change in law has had an interesting side effect. I am now asked, on a near daily basis: “Now that gay marriage is legal, why should gay couples be any more concerned with estate planning than straight couples?” 

My response to this is that, first off, straight couples should be far more concerned with estate planning than they generally seem to be, and second, as important as Washington legalizing gay marriage is, it really hasn’t changed anything for practical purposes. Before Washington legalized gay marriage it was among the ‘everything but marriage’ States, which meant that gay couples in domestic partnerships could already take advantage of all the benefits that straight married couples could, as far as Washington was concerned. The real source of many of the problems that gay couples faced was, and remains, the federal government.

No matter what State they may reside in, and no matter what stance that State takes towards gay marriage, the federal government still considers gay couples to be legal strangers, that is, unless they take steps to circumvent that default status. The obvious problem that this causes has to do with your taxes, but there are others that many people fail to consider. For example, imagine that a married gay couple live in Washington State without an estate plan in place. One of them used to live in Texas, and still owns a fair bit of property there.  Imagine a terrible accident occurs, and the individual who owns property in Texas dies. If they had been a straight couple, the surviving spouse would automatically inherit either half or all of the property in Texas, depending on when it was purchased and a few other factors.  As a gay couple, the surviving spouse would have no right to the property in Texas at all, and instead that property would automatically pass to the deceased spouse’s surviving relatives, regardless of what their wishes had been.

This scenario happens unfortunately frequently, because most States that do not allow gay marriage also do not recognize gay marriages from other States. This problem has also resulted in several high profile instances, in which, a married gay couple were visiting a State that does not recognize gay marriages, one of them became injured or ill, and the other was refused hospital visitation rights, or the rights to make healthcare decisions for their disabled spouse.

When I tell people about these sorts of situations I often hear “Well, what can you do if a State won’t recognize your marriage?” The answer to that is “A lot.” Even States that do not recognize gay marriage do recognize community property agreements and powers of attorney, and these, along with a few other important legal instruments will guarantee that both you and your spouse are protected, even if your marriage isn’t.

Hopefully the Defense of Marriage Act will soon be recognized as the inherently unequal and bigoted piece of legislation that it is, but until that happens a good estate and disability plan is the gay couple’s best defense against outdated laws.  

LGBT Equality Cliff (Not) Averted: Highlights of 2012 LGBT Rights Accomplishments

Congress may have averted the fiscal cliff but I doubt they can curb the fall of anti-LGBT legislation. In 2012 we saw monumental achievements in equality. The momentum is still growing and I do not expect it to slow in 2013. Instead, we may see a Supreme Court rule DOMA unconstitutional. Such a decision would have countless and far-reaching positive consequences; I call this potential roll out of rights the LGBT Equality Cliff.

The progress in 2012 was seen across the board, not just legislatively. Television shows had unprecedented growth in LGBT characters, actors and athletes came out as LGBT and allies, and musicians and Fortune 500 companies came out in support of marriage equality. There are positive shifts everywhere. The way that Americans think about the LGBT community is changing. Here are some of the many, many, achievements of 2012.

State Marriage

  • Maine, Maryland and Washington legalize gay-marriage
  • Rhode Island begins recognizing marriages from other states
  • Minnesota rejects a constitutional amendment denying marriage equality
  • New Hampshire blocks repeal of same-sex marriage
  • 9th Circuit Court of Appeals rules California’s Prop 8 is unconstitutional

DOMA

  • Federal District Court for the Southern District of New York rules DOMA unconstitutional
  • 1st Circuit Court of Appeals rules DOMA unconstitutional
  • Supreme Court agrees to hear two cases challenging constitutionality of DOMA

Elected Officials

  • Tammy Baldwin is elected as first openly lesbian or gay US Senator
  • Kyrsten Sinema is elected to House of Representatives and becomes the first openly bisexual member of Congress
  • Number of state legislatures with no openly LGBT members drops from 17 to 10
  • Michael Fitzgerald becomes 4th openly gay federal judge, the 1st outside of New York
  • Mark Takano becomes first openly gay person of color in US Congress

Military

  • Tammy Smith becomes first openly gay active duty general in American history
  • Sgt. Erwynn Umali and his partner Will Behrens become the first gay couple to marry on a military base
  • Pentagon hosts first-ever LGBT Pride event

Transgender Rights

  • US Citizenship and Immigration Services announces that US will recognize valid marriages for immigration purposes regardless of a spouse’s subsequent gender transition
  • U.S. Equal Employment Opportunity Commission rules unanimously that employment bias based on transgender status is tantamount to discrimination based on sex, which violates the Civil Rights Act of 1964
  • Massachusetts passes transgender anti-discrimination bill
  • American Psychiatric Association removes “gender identity disorder” from the DSM-5[i]

Media

  • Nordstrom’s, JC Penny, Microsoft, Amazon, General Mills, Macy’s, Starbucks, Viacom, Boeing, and Google announce support for marriage equality
  • NAACP announces support for marriage equality
  • President Obama and Vice President Biden announce support for marriage equality; so do Jay Z, Brad Pitt, Jason Mraz, Morgan Freeman, and Bruce Springstein
  • Anderson Cooper, Wade Davis, Orlando Cruz, Frank Ocean, and Sally Ride come out
  • San Francisco 49ers become the first NFL team to join the “It Gets Better” campaign
  • Keelin Godsey becomes the first openly transgender Olympic contender

Other

  • First PTA specifically for LGBT students is created in Long Island NY
  • Department of Justice publishes final regulations creating national standards directly addressing LGBT needs in an attempt to eliminate sexual abuse in America’s prisons, jails and local detention facilitates

As great as this list is, there are still 2012 achievements not listed.  I can only imagine what 2013 will bring. We’ve already had one victory this year when the American Civil Liberties Union secured severance pay for those discharged from the military under Don’t Ask Don’t Tell.  

What to Watch For in 2013

  • January vote on gay marriage bill expected in Illinois
  • February vote on gay marriage bill expected in Rhode Island
  • Supreme Court will review two DOMA cases in March

Happy New Year everyone!

[i] Gender Dysphoria remains in the DSM.

How Marriage Equality Affects Your Retirement: IRA Tax Loopholes Available to Opposite-Sex Married Couples Only

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Individual Retirement Accounts (IRAs) are powerful tools for funding your future.  Putting money into an IRA can be a great way to save for your retirement because it provides tax benefits in the present.  Unlike some retirement plans, IRAs can be set up by anyone; they do not have to be set up by your employer.

One of the major benefits of an IRA is that all or a portion of your contributions may be tax deductible and some taxpayers can claim a tax credit for their contributions. Additionally, any earnings on the money you’ve put in will be tax-deferred until you take the money out.  This benefit is particularly useful if you expect your annual income to be less during retirement years.

There are, of course, eligibility requirements for participating in an IRA. First, you must be under age 70 ½, and second, you may only contribute if you have taxable compensation for the year.  Each year the IRS assigns a maximum dollar amount that can be contributed; it is currently $5,000. Anyone under age 70 ½ can contribute the lesser of that $5,000 or their taxable compensation.  As an example, if you earn $6,000 you can only contribute $5,000; if you earn $3,500 you can only contribute $3,500.

It is this “taxable compensation” rule where we come to our first loophole only available to straight married couples, i.e. “spouses” as defined by DOMA.  If you are otherwise eligible to contribute to an IRA but are not working, and therefore have no taxable compensation, you can use your spouse’s income to qualify you for contributions. When one spouse earns $10,000 and the other earns $0, both can contribute up to $5,000.  Unless of course the non-working spouse is part of a same-sex couple, in which case no contribution is allowed.

This means that if a person has enough cash to contribute the maximum every year, but isn’t allowed to because they have no taxable compensation and aren’t considered a spouse, they miss out on up to $5,000 in tax deductions every year.  This essentially results in a gay person having to pay a potential $500 to $1,400 more in taxes, per year, than their straight counterpart.

Next let’s talk about what happens when you pull the money out of these plans.  Depending on what portions of your contributions were deductible, the distributions may be fully or partially taxable as ordinary income.  Furthermore, if you pull the money out before you’ve reached age 59 ½ a 10% penalty will be imposed. Luckily, for some, there are a few ways to get out of paying this.

The IRS has provided several exceptions that allow a taxpayer to avoid the 10% penalty.  While under the right conditions most of them are available to all taxpayers, there are also circumstances in which they are not.  There are three exceptions that apply to individuals who take a distribution to pay for certain expenses for themselves or their spouse[i].

  1. The money can be pulled to pay for health insurance premiums for an unemployed taxpayer or their spouse.
  2. The money can be pulled to pay for higher education expenses for the taxpayer or their spouse.
  3. The money can be pulled to pay for the purchase of a home if the taxpayer or their spouse qualifies as a first-time home buyer.

As an example of these rules in practice, let’s imagine a $10,000 distribution used to pay for higher education expenses.  One man can pull out $10,000 to pay for his wife’s education without penalty while another man who pulls out $10,000 for his husband’s education has to pay a $1,000 penalty.

Don’t get me wrong; the rules were created with good intention.  They are theoretically providing financial incentive for people to stay insured, go to college, and purchase homes.  The problem, albeit unintended, is that in this context, the exclusion of same-sex partners from the federal definition of spouse makes health insurance, education, and homes less accessible to the LGBT community.

Until rights and laws are applied equitably, we must work to understand the consequences of our legal inequality.  The benefits of marriage are more expansive than many of us realize.  I fear that as same-sex marriage begins to feel more attainable, those fighting for it will lose their sense of urgency.  Unfortunately, when it comes to financial rights and obligations, the inequality of today can have a tremendous impact on the future. Gaining parity ten years from now will not make up for present imbalance.


[i] In many cases the funds can also be pulled for children, grandchildren and certain other family members.

Dinner with Volker Beck: European LGBT Rights Leader and Member of German Parliament

Without a doubt one highlight of my trip to Europe was meeting Volker Beck, current spokesperson for Germany’s Green Party. While in Berlin, I had the honor to attend a dinner and discussion with him and a group of my colleagues.

Volker Beck is an openly gay member of German Parliament and has been working for LGBT rights since the 1980’s. His accomplishments over the past 30 years have been many. While he is most known for his work with the European LGBT community, he is also highly involved with various programs providing compensation and remembrance to Nazi victims.

Beck gave us a brief history of his political career which began in 1985 when he joined the Green Party. It was soon after, in the early nineties, that he began spearheading major projects in Germany.  Between 1994 and 1998 he played a critical role in ensuring a monthly pension for Jewish Holocaust victims, in lobbying for construction of holocaust memorials recognizing distinct victim groups, and in revoking criminal sodomy provision Paragraph 175.

The removal of Paragraph 175 in 1994 marks a pivotal time for Germany’s tolerance and acceptance of the LGBT community.  The paragraph, created in 1871, was infamous and had undergone several amendments as Germany fell under the rule of different regimes.  There is even a powerful documentary about the paragraph and how it was brutally enforced during the Nazi era.

During the broader period of 1991 to 2004, Beck was also spokesman for the Lesbian & Gay Association of Germany.  In the later of these years, Beck was responsible for bringing LGBT issues to the attention of Parliament.  In 2001 he drafted, and successfully passed, the Civil Partnership Act expanding the rights of same-sex couples to include nationally recognized registered partnerships. As I mentioned in a previous post, the partnership rights have since been expanded upon several times.  The court-won rights expansions can largely be attributed to the Equal Treatment Act of 2006, also sponsored by none other than Volker Beck.

In 2003, Beck was involved in obtaining funding for the Memorial for Persecuted Homosexuals, aspects of which remain controversial.  I saw the monument when I was in Berlin and I, too, had some issues with it. It was across the street from the Memorial to Murdered Jews of Europe and was therefore, in a way, separating being Jewish and being gay. As someone who is both, the disconnect was a bit troubling. Additionally, the placard explaining the memorial (pictured below) was far away. Regardless, I am thrilled that it exists at all.

In addition to Beck’s admirable dedication and achievements within Germany, he never stops promoting LGBT rights as an international concern.  In 2006, he travelled to Moscow to participate in their first pride parade where he intended to give a TV interview but was unfortunately interrupted by a group of anti-gay youth who assaulted him.  The attack did not slow down his activism, however, and he has continued his fight for a broader sense of equality. 

When I attempted to steer our dinner discussion towards the current LGBT tax issues in Germany he briefly confirmed that equal tax treatment is expected to be acheived in the near future but quickly brought the conversation back to international LGBT issues.  Beck relentlessly continues to encourage a global discussion.  Here, he discusses LGBT issues within the context of Uganda, Brazil, the UN and even Dan Savage.

Volker Beck is a great inspiration to me and I admire his drive for international progress, particularly, when so many advancements have already been made in his own country.  He encourages me to remain aware of things like the anti-gay violence taking place in South Africa where just last week a 19-year old lesbian was murdered. Beck’s dedication is a timely reminder to those of us in Washington where same-sex marriage has just been legalized. A battle may have been won, but the war continues. Imagine what the world could be if more people were as dedicated as he is.

Progress in Perspective: Germany Leads in Same-Sex Tax Rights

In just a few days I will be traveling to Europe, the land of ‘better’ rights, but, not necessarily equal ones.  I wanted to leave you with an entry before I left and that has led me to exploring German tax rights for same-sex couples.

Germany has had Civil Unions for same-sex couples since 2001. While Civil Unions are not technically marriages, Germany’s federal recognition, as early as 2001, frankly embarrasses me. Here we are, in 2012, fighting tooth and nail so that a mere portion of our states might legalize marriage or enact its state equivalent.  

It’s true that progress in the U.S. seems to be coming more rapidly, and I don’t think that federal recognition is far away, but it is only that.  My use of the word ‘recognition’, instead of ‘equality’, is quite intentional.  As illustrated by the development of same-sex rights in Germany, recognition of same-sex couples does not necessarily equalize rights.

Since 2001, Germany has had to make significant expansions to Civil Union rights in order for them to be more equal to marriages.  As with the United States, many of the rights have been granted by the courts.  In Germany, the decisions have predominately been made by the Federal Constitutional Court which is in some ways similar the U.S. Supreme Court. 

Naturally, of particular interest to me has been the extension of income and tax rights to German same-sex couples. The first such extension came in 2008 when a surviving partner was refused a Widow’s Pension Fund.  The court that heard the case ruled that the refusal violated the prohibition of discrimination on the grounds of sexual orientation; a logical argument that I wish had more clout in the United States.  We seem to have to resort to technicalities and loopholes just to prove a point of common sense and decency.  

Next, in 2010, the court ruled it unconstitutional to treat same-sex couples differently than heterosexual couples in a case related to inheritance tax.  This is similar to the famous case Windsor v United States.  Although the lower courts have ordered that Edie Windsor be given a refund of the taxes she paid, the case is still facing appeals and is likely heading to the Supreme Court.  Meanwhile, Germany’s case ruling not only relieved same-sex couples of a tax that their straight counterparts were exempt from, it also ordered that the government compensate surviving partners that had previously paid the tax; a respectful move that, dare I say, will never happen here.

There is speculation that the German government is close to making further changes that will equalize tax rights across the board.  What’s interesting about this development is who supports it and who opposes. 

The current Chancellor of Germany, Angela Merkel, is expected to support the expansion of rights.  She is part of the Christian Democratic Union (CDU), a conservative party whose members have recently released a statement calling for equal tax treatment.  The CDU is in coalition with the Free Democratic Party (FDP), a party typically supporting business interests. They are also in coalition with the Christian Social Union (CSU), a predominately Catholic party.  While the FDP has long supported equal rights for same sex couples, the CSU is, unsurprisingly, unsupportive.   What is surprising is that the other opposing party is the Social Democratic Party (SDP), a historically liberal party.

At first I found it strange that the conservative, business minded parties were in support of same-sex rights while the liberal party was in opposition.  That sort of landscape is nearly opposite of what we are used to here.  Then I remembered that it’s politics.  As it turns out, Angela Merkel is suspected of merely trying to save face for her upcoming re-election campaign.  She and her party have developed a reputation of opposing legislation only to have the Federal Constitutional Court rule against their position.  As a result, Merkel is expected to support the tax right expansion, just so she can do it before the court does.   As for the SPD, they are apparently not as liberal as they once were. An emerging liberal party, the Left Party, has recently poached many SDP members after the party supported grossly unpopular welfare cuts.

Regardless of the motivations behind these legal changes, the result is the same.  If Germany extends equal tax rights to its citizens, progress has been made, both in Germany and abroad.  I should be happy about all of this, and a part of me is, but there’s just one thing I can’t get past.  Germany’s path to providing equal rights to all couples seems to be a foreshadowing of what is to come in the US. Our road has been similarly marked with case after case arguing that there exists a discrepancy of rights when it comes to partnerships and marriages.  Well, of course there is. We as a nation have proclaimed that partnerships and marriages are not the same thing, even if the rights should be.  But, didn’t we determine, in 1954, that “separate but equal” doesn’t work?  Please, someone tell me how the marriage issue is any different.

“The impact is greater when it has the sanction of the law, for the policy of separating … is usually interpreted as denoting the inferiority of the… group.” – The Supreme Court of the United States, 1954, Brown V. Board of Education.

“The words (separate but equal)….. it is true, are prohibitory, but they contain a necessary implication of a positive immunity, or right, most valuable…..,—the right to exemption from un-friendly legislation against them distinctively,…—exemption from legal discrimination, implying inferiority in civil society, lessening the security of their enjoyment of the rights which others enjoy, and discriminations which are steps towards reducing them to the condition of a subject race.”  – The Supreme Court of the United States, 1954, Brown V. Board of Education.

Loss of Head of Household Filing Status for Registered Domestic Partners in Washington and Nevada and Same-Sex Spouses in California

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As taxpayers we are always looking for ways to keep more of our money.  If you are unmarried, one of the easiest ways to save on taxes is to file as Head of Household (HOH) instead of Single.  The HOH filing status has both lower tax rates and a larger standard deduction. Together, these advantages can have a significant impact on your tax bill.

RDP taxpayers have been claiming HOH status under varying circumstances for many years.  Some have a child living in the home while others have been claiming their non-working spouse as a dependent in order to meet HOH requirements.  In some cases, though technically incorrect, RDPs have even both filed as HOH when the couple has more than one child.

There are certain requirements, commonly referred to as “tests,” that must be met in order to claim HOH status.  Unfortunately, the community property income splitting rules have caused most RDPs to suddenly fail to satisfy the requirements.

There are three tests and they must all be met to qualify for HOH status:

  1. Taxpayer must be unmarried, or “considered to be unmarried.”
  2. Taxpayer must pay for more than half the cost of keeping up the home.
  3. Taxpayer must have had a “qualifying person” (usually a child) living in the home more than half of the year[i].

The first test remains easy to meet since under all circumstances RDPs are still legally single for tax purposes. If you have a dependent child, the third test also remains easy to meet.  In most cases however, if you don’t have a child you will no longer be able to use your dependent partner to satisfy the third test. There are additional tests to meet in order to claim a dependent partner as a qualifying person. For purposes of this discussion, only one of these tests is relevant.  The partner must have gross income of less than $3,700; this is known as the “gross income test.”

Now that wages, and most other types of income, are reported 50/50 between the partner’s two returns, it is almost certain that both partner’s incomes will exceed $3,700[ii]. With no child or partner who can be considered a qualifying person the third HOH test is not met and the taxpayer must file as Single.

The more common, yet less complex, reason for losing HOH status is failing to meet the second “cost of keeping up the home” test.  Since, typically, under community property rules all income is split 50/50, neither partner can qualify as paying for more than half of the cost of keeping up the home.  HOH status is lost and both partners must file as Single.

Luckily with some strategic planning, assuming the first two tests are met, there are ways to ensure that one partner can still file as HOH.  All that is needed is any amount of separate income.  If one partner has separate income, then their share of total income will be greater than 50% and may then justify the claim that they provide more than 50% of the cost of keeping up the home.

What is separate income then? There are several income sources that are intrinsically considered to be separate:

  1. Income from an inheritance provided that the underlying assets earning the income have remained physically separate and have not commingled with community property assets.
  2. Distributions from retirement funds that were earned, partially or wholly, prior to registration or marriage.
  3. Distributions from IRA accounts are always considered separate regardless of whether they were funded by property otherwise considered as community.
  4. Social Security benefits that were earned, partially or wholly, prior to registration or marriage.

There are a number of other grey area income sources, such as Health Savings Account distributions, to which the IRS has made no comment.  Income may also be designated as separate by creation of a separate property agreement. Regardless of the source of the separate income, having it or creating it can be a financially rewarding planning strategy. You may want to consult your tax professional to determine how, and if, you can maintain your eligibility to file as HOH.


[i] There is an exception to this rule. If you have a parent that you can claim as a dependent, they do not have to live with you.

[ii] This creation of reportable income also usually means that the non-working spouse must now file their own tax return when they didn’t before.

Will the Supreme Court kill DOMA in 2013?

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Court cases challenging DOMA are popping up across the nation with increasing frequency.  Over the last two years, the legislative momentum has grown dramatically. We are now at a point where we can expect at least one of these cases to be heard by the Supreme Court.  The implications of the Supreme Court hearing such a case are enormous. We could be within a year of undefining, as opposed to redefining, marriage.  If we are successful in broadening the federal definition of spouse to include partners of the same sex, many currently unavailable federal benefits will become accessible to our partners.

There are two key cases currently making their way through the courts.

Perry v. Brown (California) 

This is the infamous Prop 8 case formerly known as Perry v Schwarzenegger.  In February of 2012 a three judge panel, in a monumental decision, held that prop 8, which amended the state constitution to disallow same-sex couples from becoming married, was unconstitutional.  The judges found that there was no “rational basis” to restrict same-sex couples from the right to marry.  Judge Reinhardt, who authored the opinion, declared that Prop 8 violated the Equal Protection Clause stating:

“Proposition 8 singles out same-sex couples for unequal treatment by taking away from them alone the right to marry… the People of California may not, consistent with the Federal Constitution, add to their state constitution a provision that has no more practical effect than to strip gays and lesbians of their right to use the official designation that the State and society give to committed relationships, thereby adversely affecting the status and dignity of a disfavored class.”

Golinski v Office of Personnel Management (California)

This case stems from a from a 19-year old woman’s complaint after her application to include her wife under her employer-provided health coverage was denied. While this case may not be as well-known as the Prop 8 case, it is widely considered to be the one with most potential for success.  In July, the Department of Justice filed a writ of certiorari, basically a request that the Supreme Court hear the case. Many expect the Supreme Court will accept despite the fact that these requests are rarely granted.  This is especially noteworthy since the request asks that the Supreme Court hear the case before it makes its way through the remaining lower court appeals.  This unusual writ also includes a request to combine the case with two others challenging DOMA’s constitutionality.

Between the two cases, there is widespread conjecture that Golinski not only has a better chance of being heard by the Supreme Court but also has a better chance of being upheld.  At a conference I recently attended[i], Oregon attorney Cynthia L Barrett speculated that a win in the Brown case could require that the court issue a blanket decision allowing same-sex marriage in all 50 states. The Golinski case may instead only require a decision allowing federal benefits on a state by state basis. The expectation is that the benefits would only be available to those holding a valid sate marriage certificate in one of the six states[ii] that allow gay marriage.

Considering the pace with which states are attempting to pass same-sex marriage legislation, perhaps a Supreme Court decision of this magnitude will serve to further that drive.  In the current environment, where it is no longer possible to stand against same-sex marriage without significant backlash, as evidenced by the recent Chik-Fil-A controversy, we can, finally, imagine an attainable and expedient move towards federal marriage equality.


[i] Barrett, C.L. Ask. Tell. LGBT Estate Planning Developments, Multnomah Athletic Center, Portland, Oregon; OHSU Foundation: June 2012

[ii] Gay marriage is also legal in Washington DC and is pending in the State of Washington.

The Adoption Tax Credit – One Good Thing the Defense of Marriage Act did for Registered Domestic Partners

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Despite the adverse effect that the Defense of Marriage Act has on millions of LGBT people, there is one instance in which it helps.  That instance is the availability of the Adoption Tax Credit to those who adopt their partner’s children.  This of course only applies to those living in states that allow second-parent adoptions; but still, this one bit of law provides a benefit that would be otherwise unavailable if same-sex marriage was federally recognized.  Let me explain.

The Adoption Credit is intended to provide financial relief and assistance to those who adopt children who do not already have a parent.  For this reason, there is an exception rule that says that a taxpayer does not qualify for the credit if they are adopting the child of their spouse.  There’s that word again, only this time, it’s a good thing.   Because the word “spouse” is used, RDPs are eligible for the credit when adopting a partner’s child.  After all, we’ve been told time and again that partner’s are not spouses.  Period.  For once, the rigid federal definition of marriage provides a benefit to LGBT people instead of harming them.

The Adoption Credit has been around for some time, at least as far back as 1996 when Bill Clinton signed the Small Business Job Protection Act.  The credit was then created specifically to benefit those adopting special needs children.  Over the years, the character of the credit has changed as various provisions have been passed and have expired.  Perhaps the biggest moment in the history of the Adoption Credit was in 2010 when President Obama signed the landmark Affordable Care Act.  In addition to increasing the amount of the credit to roughly $13,000 per child, up from Clinton’s $5,000, the act also made the credit refundable.

Tax credits are either refundable or non-refundable and most are non-refundable.  The distinction is significant.  A non-refundable credit will reduce any tax owed to zero, but not below.  A refundable credit is one that will reduce your tax to zero and then refund you any excess.  So, if you have a $1,000 non-refundable credit and $800 tax owed, you end up with zero tax and zero refund.  If you have a $1,000 refundable credit and $800 tax owed, you will receive a $200 refund. 

Sadly, the refundable character of the credit is set to expire for the 2012 tax year.  As it stands now, if there are no changes, the credit will still be available for all 2012 adoptions but will be non-refundable.  In 2013 it may be non-refundable and only apply to special needs adoptions.  Although these attributes of the credit are scheduled to expire, President Obama has already once attempted to make changes.  Unfortunately, the attempt failed as it was wrapped up in his ardently defeated budget proposal.  The changes would have made the credit refundable for 2012/2013 and permanently available as non-refundable for all adoptions thereafter.  

What happens with the Adoption Credit for the 2012 tax year remains to be seen. I expect tax law changes through early 2013, as is typical. Still, if you are planning to adopt your partner’s child, 2012 may be the year to consider it.