What does the DOMA ruling mean for tax payers?

Last month in United States v. Windsor, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional under the Due Process Clause of the Fifth Amendment. 

The 5–4 decision is regarded as a landmark case for marriage equality and civil rights under law. By deeming DOMA unconstitutional, the court has returned marriage rights to the states. If a same-sex couple legally marries in one of the thirteen states or five Native American jurisdictions where same-sex marriage is legal, the federal government recognizes the marriage and extends all the rights, privileges and benefits of marriage to the couple.

The tax implications of the DOMA ruling at the federal level are considerable. At the heart of the Windsor case was the estate tax exemption of surviving spouses, otherwise known as the inheritance tax. Because Edith Windsor’s marriage to Thea Spyer was recognized by the state of New York, Windsor applied for the surviving spouse federal exemptions that allow spouses to inherit assets and property from one another tax-free. The exemption can be applied throughout their lives and at the time of one spouse’s death. Because Section 3 of DOMA defined marriage as a union only between a man and woman, Windsor was denied the exemption and faced a $363,053 estate tax on the home she and Spyer shared. 

In addition to the rights of survivorship enjoyed by opposite-sex couples through the institution of marriage, same-sex couples may now be eligible for over 1,000 benefits at the federal level that were often denied to them under section 3 of DOMA. Same-sex married couples will now be allowed to file joint tax returns. Their status as lawfully married will also affect, immigration issues, social security tax rates, capital gains and losses, child care tax credits, elderly and disabled credits. Same-sex married couples may also be able to amend tax returns filed previously to reflect their new legal status. The statute for limitations on filing amendments to a tax return is usually three years.

The tax implications of the DOMA ruling are vast and in many instances will benefit same-sex couples that marry legally. However, same-sex couples that marry will find out what opposite-sex married couples have known for years. Namely, that the federal government penalizes married couples by creating tax thresholds that are significantly lower than that of two single earners. If the couple’s combined income exceeds the threshold they will be taxed at a higher rate than two single earners would on the same amount of income or dividends. This part of the tax code is known as the “Marriage Penalty”. 

Most same-sex couples, like their opposite-sex counterparts, probably won’t let a higher tax rate stop them from entering into marriage. In today’s society, romantic love has superseded the old ideas of marriage as a contract based on security or social status. While security and status in society still play a role, it is love that drives most people to the alter. However, once couples marry professional tax advice and financial family planning becomes even more vital to creating and maintaining a healthy financial future.

Tom Bulger, CPA specializes in estate tax law, and helping families achieve their financial goals. Give Tom a call today.

Are you engaged to be married, or a newlywed wondering about the tax implications of marriage? Post your questions below.

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Is getting a big tax refund the best use of your money?

The majority of American taxpayers get a refund. In fact The IRS estimates 75% of federal filings in 2013 will result in refunds. The average amount for 2012 was approximately $2,800. A nice little chunk of change for a vacation, which is what a quarter of the population does with its tax refunds.

What can you do with your money?

Getting that big check in the mail is a nice way to start the summer for sure, but there is a case to be made that keeping that money as long as you can makes financial sense. Interest rates being what they are, $2,800 won't offer much return in a standard savings account. However, history shows that Americans overpay regardless of interest rates being high or low. If you have credit card debt even at low interest rates it should be paid off as quickly as possible. Having that $2800 in your pocket translates to an extra $107 each two-week paycheck, and that can mean the difference between just paying minimum balances and making a real dent in that debt. In addition due to the cost of inflation the $107 you paid in taxes last January doesn't have the same buying power as the $107 you receive as a refund the following year. 

Why do we choose to overpay? 

In light of the clear financial benefits of paying the tax you actually owe each pay period and keeping that $107 for yourself, why do most Americans opt to overpay? One obvious answer is taxes are confusing, even scary, and figuring out how to pay the right amount so you owe nothing and are refunded nothing requires a lot of math. This is where a good tax preparer comes in. A qualified CPA can advise you on how to properly adjust your withholding to pay what you actually owe. 

But beyond the dollars and cents there is an emotional reward tied to refunds that Americans really like. According to The Wall Street Journal (WSJ) respondents to a study who knew they could accurately adjust their withholding to "zero out" their tax refund were hesitant to do so. For some reason emotionally we feel better giving Uncle Sam a free loan than Uncle Sam giving us a free loan.

Knowing you're overpaying and getting a refund takes the worry out of taxes and no one likes writing the government a big check. Furthermore, most people don't trust themselves to set aside money to pay their taxes. They would rather participate in a forced savings account in the form of overpaying through the year and getting it back in a lump sum. And not trusting ourselves is typically a smart move as only one-quarter of those surveyed who owed taxes had set any cash aside to cover their liability.

According to a WSJ interview with Donna Bobek Schmitt of the University of Central Florida, who's studied the overpay phenomenon "we enjoy getting a tax refund more than having the extra money in our paychecks because we are more likely to spend the refund on a vacation or a new TV, but more likely to use the extra money each week to pay bills." The former is fun the latter not so much and this helps to explain why we continually overpay. 

Avoid Tax Fraud

One additional reason to not be tempted by a refund is the uptick in tax fraud. Criminals claiming your refund before you can get to it. Eliminating a refund will eliminate the theft potential.

So we Americans traditionally overpay and we like it, it is comfortable if not practical. However, we are all capable of making smart changes and Tom Bulger can help. Whether its adjusting your withholding to keep your money now and owe nothing later or making sure you get the biggest return possible, the dedicated team at Tom Bulger, CPA is here for you and your business. 

How long should I keep records?

IRS requirements for retaining tax related documents vary greatly depending on the event, expense or action the document records. Determining the proper length of time for each record can be confusing to taxpayers causing them to just save everything, resulting in a mass of unneeded paperwork.

Generally income tax records properly filed should be held for three years, however the IRS suggests keeping a copy of your tax returns indefinitely. Employment tax records have a four-year threshold from the payment date. Claims for credits or refunds should be retained for three years and claims filed for losses from worthless securities and or bad debt deductions require a seven-year retention. Retention periods for documents connected to assets like property are tied to the year in which you dispose of the property in a taxable disposition, however, you must retain records to account for depletion deductions, depreciation, or amortization so you can report any gain or loss when you sell or dispose of the property. While these are basic, general requirements they are not without caveats and this is where a qualified and experienced tax preparer can guide the taxpayer in proper document retention. 

Taxpayers should also consider which records must be retained for non-tax purposes. Agencies other then the IRS, like insurance providers or creditors, may require longer retention rates then the IRS. 

Another important consideration for taxpayers is the security of their retained documents, and the ability of family members or representatives to access the documents in the case of an emergency. All sensitive and irreplaceable documents should be kept safe from fire, flood and especially burglary. You may think no one is interested in your tax return; however, identity thieves are interested in your tax refund. All a thief needs is your social security number to file a fraudulent tax return and cash that refund check. The IRS reports that since 2008 tax return identity theft is up 650%, with over 650,000 cases currently unsolved. A safe or safety deposit box is a good solution for sensitive records and or where the original paper document must be retained. Scanning and securely storing digitized copies of these documents is another good measure against permanent loss, but those records should also be securely stored. 

Again, make sure a designated family member or representative knows how to access your vital documents in a time of crisis. Qualified estate planners and tax professionals in addition to helping you protect your assets can help you determine which documents you must retain and should be held under lock and key as well as creating an organized system for your financial records management.

The U.S. Tax code is currently 4 million words long. IRS provided guidance to filing taxes and all the requirements for document retention, stands 1 foot tall when printed. Since 2001 there have been 4,680 changes to the tax code, this averages to about 1 per day. It is no wonder that a majority of U.S. taxpayers hire a tax professional to prepare their returns, plan their estates and guide them in asset management. 

Think you know what tax documents to keep and what to toss? Ever been wrong?  

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