Happy New Year and welcome back to the Same Sex Tax Law Blog. Something important happened in December that I haven’t yet mentioned on this blog. Congress finally gave us some tax certainty by enacting the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. I’ll call it simply the Tax Relief Act of 2010. It gives us certainty (maybe) for two years – so already you know I’m being facetious. But the question I’ll address in this post is this: what’s in it for same-sex couples?
The answer: Quite a lot if you’re rich and worried about the estate tax. But, not much if you’re in the low-income range and worried about different things, like can I claim any child tax benefits because I am the sole support of my family, which includes dependent children. Actually, that’s kind of par for the course these days whether you’re in a gay or nongay family.
Here’s my take on it all. The estate and gift tax provisions are a gift to the wealthy, including the gay and lesbian wealthy – although as usual we don’t get as much as the nongay wealthy. Here’s what we do get and it is not insignificant:
(1) Individual estate tax exemptions are increased to $5.0M, from the $1.0M level that was scheduled to take effect on January 1 of this year. This is huge for the very wealthy or for those couples living in California where $5.0M will almost cover a personal residence, employer-provided retirement plan, and life insurance. Even without the marital deduction, we can now leave our spouses fairly well provided for “after taxes.”
(2) The lifetime gift tax exemption is increased from $1.0M to $5.0M. This is even “more huge.” For couples around the 50 states where one partner/spouse is supporting the other one, the provision of support is deemed to be a taxable gift (except in states where state law requires support of a recognized partner). And so each payment of the mortgage by the partner with income, or each payment of the grocery bill, to the extent the total exceeds $13,000 a year, will require a gift tax return. The good news is that for most couples, now that the lifetime exemption is $5.0M, this form of support will never result in a gift that requires the payment of taxes. (If you aren’t clear about the difference between a “taxable gift” [exceeds $13K in a year] and a gift that results in tax liability [cumulative “taxable gifts” exceed $5.0M exemption amount] you should email me).
(3) For those advisors who have been working with same-sex couples and have been reluctant to approve gift-giving plans that have omitted past support payments, this new law creates an opportunity. Make a huge gift this year and report it, including all past payments of support (hopefully not in excess of $1.0M, the amount of the prior gift tax exemption). You should probably use the full $5.0M exemption as soon as possible, though, because we may only have it for two years.
What is the cost? Under this new regime, America loses tax revenues that it should be collecting from wealthy taxpayers who pass down wealth to the next generations. I believe that taxes on wealth transfers to the next generation are justified. They are not “death taxes.” They are taxes on privilege. I love it that the 2010 Tax Relief Act gives some relief to rich lesbian and gay couples. At the same time, I hate to think that this tremendous estate and gift tax benefit for same-sex couples is simultaneously undermining basic principles of fairness and progression in the Tax Code. But truth is, it is. It would be better if Congress gave us the marital deduction. And even better, if tax law recognized all of our different family forms.
