The Economic Impact of the End of DOMA

Olivia Clifford |

In a 5-4 decision on capital hill today, the 1996 Defense of Marriage Act was invalidated and ruled unconstitutional due to the fact that it denied same sex couples the benefits that all married heterosexual couples receive. The Act, which defines a marriage as a union between a man and a woman, violates the due process and equal rights protection of those in a same sex marriage. In light of the historical decision, Americans as well as the government as a whole have to assess and prepare for both the positive and negative financial impacts of the decision. The decision allows for same sex couples to access over 1,000 spousal benefits that were previously denied them. The major financial impact comes from the changes in taxes, health insurance and social security benefits. President Obama released a statement early this morning in response to the decision to express his belief that the tax and benefit transition will be a smooth one.

"We welcome today's decision, and I've directed the Attorney General to work with other members of my Cabinet to review all relevant federal statutes to ensure this decision, including its implications for Federal benefits and obligations, is implemented swiftly and smoothly.”

Effect on Taxes:

Income Tax:

With the new benefits same sex couples are now be able to receive under federal law, the tax breaks are some of the most important. Same sex couples will now have the ability to file their income taxes jointly, and this will mean a welcome tax break for those in households where one partner makes substantially more then the other. This allows them to be able to file in a lower tax bracket and earn big savings. The downside to this change comes for those whose salaries are similar; same sex couples that earn similar salaries run the risk of having to now pay more money in income taxes when they file jointly.

Protective Refund Claim:

There is now the option for same sex couples to receive a refund for the money that they paid in income taxes. It amends the overpayment from the last three years, giving them some of their hard earned money back, possibly to plan the weddings about which they have been dreaming while the decision was deliberated.

Gift Tax:

They now have the benefit of being exempt from gift tax when combining their assets. Before DOMA was overturned, any amount from $1,400 to the lifetime cap of $5.25 million was taxed at a rate of 40%. This is a huge financial break for those who are transferring their assets, as they are no longer potentially loosing large sums of money to federal taxes. This isn’t applied however to those same sex couples who choose to divorce. They are still subject to gift taxes when dividing their assets.

Unlimited Marital Deduction:

This benefit now allows same sex couples to be able to transfer property tax without penalty or charge to one another.

Effects on Health Insurance:

With DOMA overturned, many federal employees will now be granted the same spousal benefits that heterosexual couples have traditionally received through their partners' insurance plan. This, along with abolishment of the extra income tax that was previously paid on the medical benefits that one partner receives through the other's benefits  allows for more affordable health care to same sex couples.

Social Security Benefits:

Social security and death benefits were one of the biggest issues that same sex couples faced. Now, with the change in federal policy, they are eligible for the same benefits as any other married couple. This means that same sex couples are now eligible for social security survivor benefits as well as being exempt from the 40% federal estate tax on assets in excess of $5.25 billion.

All of these federal policy changes are a step in the right direction towards achieving marriage equality. Though these new benefits are not applied to those who are living in states where same sex marriage isn’t recognized under state law, as they are not applied to domestic partnerships or civil unions, they put in place a legal framework by which the long-awaited changes may take place.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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