Whitewood v. Wolf Income and Inheritance Tax Implications
While same-sex marriages have been recognized by the Federal government since last year’s Supreme Court ruling in U.S. v. Windsor, similar recognition was not afforded same-sex couples by the State of Pennsylvania until this past May. On May 20, 2014 a federal judge ruled in Whitewood v. Wolf that Pennsylvania’s ban on same-sex marriage was unconstitutional. With this newfound recognition, same-sex couples face a host of legal and financial issues, not the least of which is state taxes.
Following the Windsor decision, the IRS proclaimed it would recognize all legal same-sex marriages regardless of whether a couples’ current state of residence did, for tax purposes. This meant that same-sex couples married legally in another state were entitled to federal tax benefits. While the Department of Revenue has not yet issued an official pronouncement on the issue, it is our opinion that they will likely adopt a similar “state of celebration” principle in recognizing marriages for tax purposes in Pennsylvania.
Pennsylvania couples are unlikely to see the same impact on their aggregate state income tax burdens as they did on their federal income taxes, because Pennsylvania has a flat tax rate for individuals and couples. However, there will be administrative benefits. Couples will most likely be able to file joint returns. This will save on the cost and hassle of preparing individual returns.
The primary tax benefit for newly recognized same-sex couples though, will be in the realm of estate planning. Prior to recognition, when one partner transferred assets to the other upon death, the transfer was subject to a 15% inheritance tax. Following Whitewood, a same-sex spouse will likely be taxed at the same 0% rate as all other legally married couples. No official guidance has been issued by the Department of Revenue relating to inheritance tax returns filed prior to the Whitewood decision. These changes will present a great opportunity for couples to reevaluate their estate planning documents.