It’s tax season again, which means that it’s time to file your gift tax return if you made taxable gifts in 2017. This year’s gift tax return instructions contain an interesting change for taxpayers who made taxable gifts to a same sex spouse prior to the Supreme Court’s decision in United States v. Windsor. (If you, like me, have been thinking that our federal government did nothing kind in 2017, you’ll like this one.)
First, some background. The Defense of Marriage Act (DOMA) was the federal law that prohibited same sex marriage. Under DOMA, a taxpayer who made gifts to his same sex spouse in excess of the annual exclusion was required to use some of his applicable exclusion amount because the gifts were not eligible for the marital deduction. In addition, a taxpayer who established a trust for the benefit of a much younger same sex spouse (who qualified as a “skip” person under generation skipping transfer (GST) tax law) was required to allocate a portion of his GST tax exemption to the trust if he wanted the trust to be GST exempt.
Heterosexual married couples were required to do neither. A heterosexual married taxpayer could make unlimited gifts to a spouse without allocating application exclusion. In addition, a heterosexual spouse would never be considered a “skip” person for GST purposes, no matter the age difference.
In 2013, in Windsor, the Supreme Court held that DOMA was unconstitutional. Shortly after Windsor, the IRS issued new rules that stated that same sex marriages would be treated the same as heterosexual marriages under federal tax law. Gifts between same sex couples would be treated the same as gifts between heterosexual couples. The gifts would be eligible for the unlimited marital deduction, no applicable exclusion would have to be used, and the spouse would not be considered a “skip” person for GST purposes.
But the injustice imposed by DOMA prior to 2013 was not remedied until 2017 when the IRS released Notice 2017-15. In 2017, the IRS now offers the following two (2) remedies for same sex taxpayers:
- Restoration of Applicable Exclusion Amount. A taxpayer who used his applicable exclusion when reporting gifts to a same sex spouse can now file a gift tax return and request that his exclusion be “restored”. The taxpayer can get back his previously used exclusion by filing a gift tax return with a calculation of what he used in prior tax years. This can be done even if the limitations period has run, which means the exclusion can be restored back to the beginning of the marriage, as long as the marriage was recognized under state law. If the taxpayer would have to make a QTIP or QDOT election to qualify the gift for the unlimited marital deduction, he will also have to file a request for 9100 relief.
- Recalculation of the Available GST Exemption. The IRS will treat as void certain allocations of GST exemption to transfers to a same sex spouse and/or his or her descendants. This allows the taxpayer to recalculate his remaining GST exemption and get back GST exemption allocated on prior returns. As above, to obtain relief, the taxpayer must file a gift tax return and explain the recalculation of his or her GST exemption.
In both cases, the IRS states its preference that the restoration and recalculation be done on the first gift tax return required to be filed after issuance. This means the requests for recalculation should be made on the 2017 return, if 2017 gifts were made.
Image of Denslow’s Humpty Dumpty 1904 from Wikipedia.