Attorney General Eric Holder Memo on Federal Benefits Post-Windsor

“This is what we have been waiting for from the attorney general.”

Maureen Cohon, Esquire

Attorney General Eric Holder has issued a memo on how the Windsor decision will effect federal programs. This is a result of the year long review after Windsor. The memo can be found here by clicking on the link below:

http://www.justice.gov/opa/pr/2014/June/14-ag-653.html
 

Gift tax Consequences of Real Estate Transfers

By Lauren Sweeney

Often times, one partner in a same-sex couple owns real property and seeks to add the other partner to the title or deed for no consideration (i.e. when no money or other type of payment is received in return).  Though this may appear to be a straightforward process, it is important to keep in mind that there are tax consequences for so doing. This type of one-sided property transfer constitutes a taxable gift for federal gift tax purposes.  Under the federal tax laws, there is a gift tax reporting obligation to the extent that the fair market value of the gifted interest, exceeds the available annual exemption in the year of the gift.

This reporting obligation does not necessarily imply a tax liability.  According to The American Taxpayer Relief Act, each American taxpayer has a $5 million cumulative lifetime gift and estate tax exemption.  This means that any amounts given during life or transferred upon death that total less than $5 million will be transferred free of tax.  Additionally taxpayers are allowed to make annual gifts up to $14,000, per recipient, which gift does not count towards the $5 million lifetime maximum exemption.   Any gift amount to an individual that exceeds $14,000 is considered a taxable gift, and the taxpayer who made the gift is required to file a gift tax return.  Gifts that exceed the annual exemption amount accumulate from year to year and count toward the $5 million lifetime maximum exemption, as do any assets that are part of an inheritance.

The use of a “tenancy in common” may be a beneficial means for gifting the other partner into ownership with minimal gift tax consequences. Because the shares of ownership do not have to be equal in a tenancy in common, the partner may choose to gift a share of the property to the other partner each year (up to the annual exclusion amount) until the desired property apportionment is received.   Best-practices compliance involves not only a gift tax return filling, but also a real estate valuation of the fractional interest being gifted.

Since the repeal of DOMA, legally married spouses can transfer property to their spouses free of the gift tax.  For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married.  However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.  Gifts to your spouse are eligible for the marital deduction.

Due to the complexity of both real estate and tax law, it is advisable that individuals consult with an attorney prior to adding his or her same-sex partner to a title or deed to ensure proper reporting of both the real estate transfer and gift tax reporting.

Adoption Tax Credit for Same Sex Couples

About the Adoption Credit

Under The Internal Revenue Code Section 36C, an individual taxpayer may claim an adoption credit for qualified adoption expenses paid or incurred by the taxpayer. The total qualified adoption expenses that may be claimed as a credit for all taxable years is limited to $10,000 adjusted for inflation (the 2013 amount is $12,970).  The amount of the credit is reduced proportionately if the taxpayer’s modified Adjusted Gross Income is between $194,580 to 234,580. The credit is nonrefundable, if a taxpayer owes no federal taxes, he or she cannot receive a refund; however the taxpayer can carry the balance of the credit forward for up to five years.  A non-refundable credit can reduce the amount of tax the taxpayer owes to zero, but not below. On the other hand, a refundable tax credit can reduce the taxpayers to zero and the IRS refunds remaining balance to the taxpayer.

Same Sex Adoptions and the Adoption Tax Credit

Both same sex partners (if each is an adoptive parent) may qualify for the adoption credit on the amount of qualified adoption expenses paid or incurred for the adoption. The same sex partners may not both claim credit for the same qualified adoption expenses and neither partner can claim more than the amount that he or she incurred. If two same sex partners each paid qualified adoption expenses, to adopt the same child and those expenses exceed the $12,970, the maximum credit available is still $12,970. The partners may allocate this amount between them any way they agree, but the amount allocated may not be more than the amount paid or incurred.

Traditionally, qualified adoption expenses do not include the cost of adopting a spouse’s child.  If a couple is in dire need of the tax credit, it may be beneficial to postpone marriage until the potential spouse’s child is legally adopted. In addition, the law specifies that the adoption credit is not available to the biological parent, so the credit should be claimed by the non-biological parent.  In cases like this, it is extremely important that the non-biological parent be able to prove that he or she is the one who paid for it – for example, by using separate banking accounts and credit cards.  (Click here for additional IRS answers to FAQ’s regarding same-sex adoption credits).

Now that same sex marriages are recognized under both federal and Pennsylvania law, a married couple can claim the credit by filing a joint tax return as long as neither spouse is a biological parent and the child is adopted by both parties after the marriage.

For more information on the adoption tax credit or tax return preparation in general, please contact Lauren Sweeney in our Pittsburgh office at (412)-562-1530. Lauren is a tax specialist with over 8 year preparing both simple and complex individual income tax returns.