Same-Sex Couples Tax Planning

Same-sex marriage is allowed in New York. The same-sex individuals who marry in New York are able to enjoy state level rights based on their marital status. Rights granted under New York state law to married couples who divorce are available to same-sex couples who marry. Rights granted under New York state law to married couples upon the death of one of the individuals are available to same-sex couples who marry. These rights include rights relating to intestate succession.  Intestate succession means the distribution of a decedent’s property when s/he dies without leaving a valid will.  There is also the right upon death to receive an elective share from a spouse.  An elective share requires a decedent spouse by state law to leave a portion of his or her property to his or her spouse at death.  Upon death in New York for married couples, there is the right to receive a state estate tax marital deduction.

The Federal Defense of Marriage Act (DOMA) expressly prevents federal recognition of same-sex marriages. Under DOMA, the “marriage” is defined as only a legal union between one man and one woman as husband and wife. This leaves inconsistencies between New York and federal law. For instance, New York state law would confer on a married spouse certain rights in divorce. These rights include spousal maintenance or alimony and equitable distribution of marital property. There is no corresponding federal income tax advantage. Alimony or maintenance is treated as income to the recipient for federal and New York tax purposes. Federal income tax law lets the payor deduct such divorce payments for income tax purposes. The party in the same-sex couple who divorces and pays alimony or maintenance cannot benefit from a federal income tax deduction, although the state may permit it. This inconsistency should be understood by the individuals if they are executing a prenuptial agreement negotiated between the same-sex couple before they marry. For instance, the parties could agree on a sum for maintenance or alimony assuming that no federal income tax deduction is available to the payor, but have the amount amended if federal law were to modify so that the net economic position to each person would be as agreed between the individuals at the time of the siginging of the prenuptial agreement and marriage.

There are also inconsistencies between federal and New York law on estate tax benefits at the death of a same-sex individual. Any property passing to a same-sex surviving spouse upon the death of the first spouse to die will not qualify for a federal estate tax marital deduction. Transfers between spouses during marriage may incur federal gift tax or use of one spouse’s gift tax exemption. This does not exist for married heterosexual individuals. The same-sex couple will need to put more care into estate and transfer planning than the heterosexual married couple.

Though the New York state legislature allowed for same-sex marriages and grant state rights on the married same-sex couple as a heterosexual couple, as long as DOMA remains federal law, federal rights and advantages are not conferred on the same-sex individuals. Parties to same-sex marriages in New York need expert tax planning to protect the legal rights of each of the individuals in the event of divorce or death.

Contact an experienced New York tax attorney to help you with individual tax problems.