Financial impact on same-sex couples of overturning Defense of Marriage Act

From a financial standpoint, same-sex married couples have much to gain -- and some to lose -- if the U.S. Supreme Court overturns the federal Defense of Marriage Act.

The high court decided on Dec. 7 to hear two cases challenging federal and California laws that define marriage as a union between one man and one woman.

The federal case challenges Section 3 of DOMA, which prevents the recognition of same-sex marriage at the federal level for all purposes including Social Security, taxes and immigration. Overturning this section would not automatically make same-sex marriage legal in every state, but the federal government would recognize the marriages in states where they are legal.

The second case challenges Proposition 8, a voter-approved initiative that prevents same-sex couples from getting married in California, which recognizes same-sex marriages that were legally entered into before Prop 8 took effect in November 2008. If the court overturns Prop. 8, same-sex couples could legally marry in California again, but it would not have a big financial impact unless the court also rules that DOMA is unconstitutional.

Many same-sex couples are aware of the benefits they would get if the court strikes down DOMA, such as becoming eligible for Social Security spousal benefits and getting a foreign-born spouse on the fast track for permanent resident status.

But "it's not a panacea of benefits. There are advantages and disadvantages," says Nanette Lee Miller, a partner with accounting firm Marcum.

On the downside, most higher-income couples would pay more income taxes and some middle-income couples would have a greater portion of their Social Security benefits taxed. Some could also lose need-based scholarships or welfare benefits when their incomes are combined.

The biggest benefits happen "at the end of a relationship, upon death or divorce," says Frederick Hertz, a lawyer and author of "Making It Legal."

If DOMA is overturned the financial implications are many.

For one, same-sex couples would have to file their federal income tax returns as married filing jointly or married filing separately. (The latter seldom results in a lower tax.) Today, they must file as singles or head of household. For many, joint filing will result in higher taxes.

For many years, many married couples have paid more income tax on a joint return than as two singles. The tax code imposes a higher tax on married couples under the assumption they can live more cheaply than two individuals.

One exception: If two spouses have a large disparity in incomes, they often pay less tax after getting hitched.

The Bush-era tax cuts temporarily eased the marriage penalty and erased it for low- to middle-income couples, but it still exists for higher-income ones. At around $150,000 in combined taxable income, "you start to pay a marriage tax penalty," says Pat Cain, a tax-law professor with Santa Clara University in Santa Clara, Calif.

If the Bush tax cuts expire after Dec. 31, the old harsher marriage penalty comes back for all.

In California, legally married same-sex couples and registered domestic partners must file their state tax return as married, filing jointly or separately. But they still must file their federal tax returns as singles or head of household.

However, instead of reporting separate incomes on their federal return, they must each report half of their community property income. This cumbersome income-splitting rule was the result of an Internal Revenue Service decision in 2010. It also applies to same-sex couples in Washington and Nevada, which have same-sex unions and community property laws.

Although it's a pain (and expensive) to get their tax returns done, many higher-income same-sex couples pay less under this scheme than they would as two individuals or a married couple. "It's an ironic windfall to same-sex couples," Hertz says.

This windfall would go away if DOMA is overturned.

(Reach Kathleen Pender at kpender@sfchronicle.com )

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