NEW YORK (MainStreet)—This week the Supreme Court will take up one of its most controversial issues since the Affordable Care Act: gay marriage. Today and Wednesday the Court will hear arguments in United States v. Windsor and Hollingsworth v. Perry cases which challenge the government’s right to restrict marriage to straight people alone. And there are significant financial implications at stake—highlighted all the more at tax season.
Windsor addresses the Defense of Marriage Act, or “DOMA,” an act of Congress which defines the institution as between a man and a woman for all purposes of federal law. It means, in essence, that regardless of a gay couple’s status under state law, the couple can never be married in the eyes of the U.S. government.
Hollingsworth challenges Proposition 8, a 2008 referendum which amended the state constitution of California to ban gay marriage, which had recently been made legal statewide. Both cases have been victories for gay marriage proponents so far, with district and appellate courts overturning DOMA and Proposition 8 respectively.
If the Supreme Court upholds either or both of those rulings it would have a large impact on the American landscape. Upholding Windsor would mean that the federal government could no longer restrict its definition of marriage to heterosexuals, forcing it to recognize gay unions where legal.
A decision to uphold Hollingsworth could strike even more broadly, as the lower courts in that case have ruled that the government has no legitimate basis for drawing a line between homosexual and heterosexual couples at all. If the Supreme Court affirms this reasoning it will have effectively outlawed outlawing gay marriage the same way that it did interracial marriage in Loving v. Virginia. Considering that only nine states currently allow gay marriage, and 29 have amended their constitutions specifically to ban it, this would be a massive upheaval.
For gay couples everywhere, these cases will likely have a major impact on their wallets. Both federal and state governments award significant financial incentives to married couples, allowing them access to each other’s resources, shared government benefits and often considerable tax breaks. Currently that entire system is largely reserved for heterosexuals; however, Windsor and Hollingsworth have the potential to change all that.
“There’s a lot of pieces to the tax and transfer system we have that’s designed to help the lower income people in a marriage,” said David Weisbach, a professor at the University of Chicago Law School who specializes in taxation. “The number of penalties that a gay couple could suffer because of DOMA could be huge.”
The single biggest issue, according to Weisbach, is what’s known as “the marriage bonus,” a benefit that couples receive when they file as a single household instead of separately.
Under the tax code, everyone gets to exempt a certain amount of income from his or her taxes. In other words, you only pay on the money you made above a given number. The marriage bonus allows couples to double this amount of money exempt from taxation if they file with one, joint income rather than two individual ones. Although this doesn’t do much good when both spouses are high earners, for the far more common situation where one person takes home more than his or her partner, the benefits can be significant.
For 2013, an individual making between $36,250 and $87,850 is taxed at 25%; income above that plops them in the 28% bracket. Marrieds filing jointly, on the other hand, can make up to $146,400 before hitting the 28% bracket.
“The way that our current structure works is that most of the time [people] get marriage bonuses,” Weisbach said. “So we are essentially taxing a married gay couple at a higher rate than we are a straight couple.”
Although there are innumerable, small ways that gay couples would see their finances change and improve under the marriage laws, two others stand out in particular: the estate tax and social security benefits.
The estate tax is, in fact, at the heart of United States v. Windsor, in which the plaintiff Edith Windsor has sued the government to recover $363,000 that she had to pay the IRS after her wife’s death. Had the federal government recognized her state of New York marriage, she would not have had to pay anything. This is an unlimited exemption under the tax code, according to Weisbach, and allows married couples to share assets fully that otherwise would be subject to taxation.
Social Security survivor’s benefits will also come into play.
“A huge portion of old people rely on social security,” Weisbach said. “And [gay people] are not married for social security purposes.”
Under the program as it currently stands, a surviving husband or wife is entitled to half of a spouse’s Social Security benefits upon death. As with the marriage bonus, this is a major issue for couples where one spouse has historically worked or earned considerably more than the other. A partner who did not work might still depend upon a spouse for income.
As the law stands now, since all gay couples are merely cohabitating rather than married for the purposes of the federal Social Security program, if the spouse collecting benefits dies the other will be left with nothing at all. By contrast, straight couples at least have the comfort of knowing they will not be left destitute.
That could change, however, if the coming hearings convince the court. If gay marriage is recognized by the federal government or U.S. Constitution, spouses will be able to take advantage of all the benefits offered to married couples regardless of the sex of a partner.