On May 20, 2014, United States District Judge John E. Jones, III, ruled Pennsylvania’s ban on same-sex marriage unconstitutional in Whitewood v. Wolf, holding that Pennsylvania’s mini-DOMA violates both the Due Process and Equal Protection clauses of the Fourteenth Amendment of the United States Constitution. Judge Jones’ ruling directs Pennsylvania to not only recognize out-of-state same-sex marriages, but also allows same-sex couples to wed within the state.
Pennsylvania became the 19th state to legalize same-sex marriage and the last state in the northeast to do so, but is among a host of other states whose court systems have legalized same-sex marriage in recent months. Many other states’ rulings about the constitutionality of same-sex marriage have been stayed due to appeals; however Gov. Corbett has annouced that he has no intenion to appeal the ruling. LGBT couples began applying for marriage licenses immeidately following the ruling. In fact, it was reported that 18 marriage licenses were issued in Philadelphia to same-sex couples the afternoon of the historical ruling.
The Whitewood ruling comes less than a year after the Supreme Court of the United States ruled in United States v. Windsor that section 3 of the Defense of Marriage Act (DOMA), which limited marriage to a union of one man and one woman, was unconstitutional. This ruling affected a multitude of federal rights and benefits linked to marriage, none more than income and estate taxes. Following suit, the Whitewood ruling also yields significant state tax changes for married same-sex couples in Pennsylvania.
In the wake of the Windsor case, the IRS issued Revenue Ruling 2013-17 stating all legal same-sex marriages would be recognized for federal tax purposes, regardless of the laws of the state the couple resides in. This Revenue Ruling clarified that all married same-sex couples, for better or for worse, must file their income and estate tax returns as married individuals. While this change may cause additional tax for some couples, the vast majority of married same-sex couples will owe less federal income tax and certainly less federal estate taxes.
Yet, despite these ground-breaking federal changes brought by the Windsor case and subsequent IRS ruling, many state laws remained unchanged. For couples living or filing in the majority of states that do not recognize same-sex marriages (previously Pennsylvania) their marriages remain unrecognized at the state level. Prior to the Whitewood ruling, Pennsylvania required legally married same-sex couples to file separate “single” state income tax returns, even though they were required to file joint federal returns. From an economic standpoint, this represented a senseless and costly administrative burden for both the couples and the commonwealth. Since Pennsylvania does not allow for exemptions, deductions or netting of income and deductions between spouses, filing status in Pennsylvania does not have the same importance it does for federal taxation. Almost without exception, two individuals would pay the exact same amount in Pennsylvania income tax if they filed two separate single returns or one joint return. The requirement was merely a procedural exercise that costs the commonwealth much needed budget dollars, added additional costs for the extra tax filing and worst of all, undermined the legal (not to mention emotional and loving) commitment of marriage for an entire segment of the commonwealth’s population.
In the wake of Judge Jones’ ruling, however, the requirement for married same-sex couples to file separate Pennsylvania income tax returns has been eliminated. Married same-sex couples should now file their Pennsylvania income tax returns with a married filing status, including any 2013 returns that are on extension. While the it is feasible that a couple could file amended 2013 Pennsylvania income tax returns previously filed “single” with a married filing status, there are few, if any, situations in which this would yield a tax refund due to Pennsylvania’s unique income tax rules explained above. However, this change should facilitate simplified return preparation and eliminate unnecessary filings going forward: A win for the commonwealth, taxpayers, and tax preparers.
Yet, the story is rather different when it comes to the Pennsylvania inheritance tax, which had been particularly inequitable for legally married same-sex couples. The inheritance tax is imposed on the value of a decedent’s estate transferred to heirs. The tax rate imposed on transfers at death varies depending on the heir’s state-recognized relationship to the decedent. The rate is zero for transfers to surviving spouses, starts at 4.5% for children, and can go as high as 15%. Prior to the Whitewood ruling, Pennsylvania treated a surviving spouse from a same-sex marriage as a legal stranger for the inheritance tax and imposed the highest 15% tax rate on such transfers. It had often been referred to in Pennsylvania’s LGBT community as the “gay tax” – and for good reason.
In light of the Whitewood ruling, however, married same-sex couples will no longer be subject to the 15% rate on transfers to their legal spouse, allowing these transfers to occur inheritance tax-free. This opens the door for many estate-planning opportunities for married same-sex couples. Married same-sex couples should be sure to update their estate plans and documents to account for these law changes since many couples previously had to craft their estate documents around the inequitable tax laws. Additionally, there may be an opportunity to amend prior-year inheritance tax returns to claim a refund for taxes paid on transfers to a surviving spouse. You should consult with your tax advisor or legal counsel if you recently paid Pennsylvania inheritance tax on transfers from your legal spouse.
Clearly, the Whitewood ruling is a tremendous step forward for equality in Pennsylvania. Married same-sex couples in Pennsylvania are now afforded the same tax and legal benefits as married opposite-sex couples under both federal and state law. Most notably in Pennsylvania, all married couples (same and opposite sex) can file joint state income tax returns and will not be subject to inheritance tax on transfers to a surviving spouse. Tax law is complex enough without the added burden of varying federal and state filing statuses. Now if we could just chip away at the approximately 74,000 pages of the Internal Revenue Code....
For more information about the history of the Whitewood v. Wolf case, including copies of the various legal documents involved, click here to visit the ACLU web-page.
To learn more about the LGBT tax consulting & financial planning services offered by the Drucker & Scaccetti Tax Warriors, click here.