Money Talks
Financial Advice by Melissa Myers and Michael Tucker

The Tax Tangle
Federal and state laws are creating bizarre situations for same-sex married couples in California

Melissa Myers: People have been asking about the status of the couples who got married in California during the “window” of opportunity before the voter referendum eliminated gay marriage in California.

Michael Tucker: We’ve all been following the drama of the California Supreme Court decision that confirmed the legality of Proposition 8, and the federal district court decision earlier in August that declared it unconstitutional.

Myers: Those 18,000 California same-sex couples whose marriages are “grandfathered” under California law may be joined by others who may be able to marry in California once the appeals of the federal court decision are exhausted. Let’s talk about whether there any effects in Arizona after all this legal flip-flopping.

Tucker: Well, for the most part, the effect in Arizona of a California same-sex marriage after the recent court decisions is no different than it was before the court rulings. Arizona has a defense of marriage statute that provides that same-sex marriages from other states are not recognized under Arizona law.

Myers: Looming over all of these state-law developments is the federal defense of marriage law. Until there is marriage equality under federal law, some of the developments and disputes over the effect of state law amount to tempests in a teapot.

Tucker: That federal law is the subject of a recent “rogue” federal district court decision in Massachusetts that calls into question its constitutionality. Until the federal defense of marriage act is repealed or declared unconstitutional, federal law does not recognize same-sex marriages.

Myers: The dichotomy between federal and state law on same-sex marriage is creating some bizarre situations for California same-sex married couples, particularly regarding their income tax filings.

Tucker: Yes, and California same-sex couples who marry may be surprised when their marital status later renders them responsible for their same-sex spouse’s tax liens, credit card debt and so forth.

Myers: Marriage comes with a mixed bag of tax issues ranging from the different filings that would be required for federal taxes vs. state taxes to implications of a split up and ensuing division of assets between the two individuals.

Tucker: Indeed, especially the tax complexities that often come up with the unraveling of a marriage. These can be significant. You might be surprised at how different these tax aspects would be depending on whether you are unraveling a relationship inside or outside marriage. Gay divorces could be just as protracted and expensive as traditional divorces.

Myers: Married or not, it’s essential for couples, in particular, to have wills and financial powers of attorney completed and signed. Some couples may need one or two trusts, depending on their financial circumstances and their dispositive wishes. California domestic partner registry and gay marriage both create certain automatic inheritance rights, as well as other legal rights, but those rights would only have impact in the event that the deceased partner or spouse was a legal resident of California at the time of death.

Tucker: Some couples who are married in California (or those who are willing to register as domestic partners in California) may experience changes in circumstances in which it would serve them to relocate from one state to another in order to be considered “married” or not for a particular legal purpose. For example, what if such married couples or registered domestic partners lived in California, and if one spouse or partner fell ill, and if the ill spouse or partner and needed to apply for state medical insurance (Medi-Cal in California, AHCCCS in Arizona)? That couple might choose to live in Arizona, where the assets of the “well” spouse or partner would not be taken into account in determining the eligibility of the ill spouse for state health benefits.

Myers: Conversely, what if an Arizona couple had gotten married in California and wanted to minimize state income taxes on their income during retirement? They would want to compare the state income tax burden in California, where they could file their state income taxes jointly, to the state income tax burden in Arizona, where their only option would be to file separately.

Tucker: Wow, we’ve laid out quite a few items that haven’t hit the mainstream press about the latest series of events surrounding gay marriage. As legal and financial professionals, sometimes we have the role of pointing out these details because we see firsthand how lack of attention to details can complicate things later.