Life After DOMA: Gift Tax

When we talk about taxes in light of the U.S. Supreme Court striking down the Defense of Marriage Act, the conversation is always around income taxes, and sometimes FICA taxes.

But there are two other types of taxes out there affected by the DOMA ruling: gift tax and estate tax.

Gift Tax

I find that most people have never heard of gift tax. Here’s what it is:

Tax law says you can give up to $14,000 of gifts to any one person during the year. If you give more than $14,000 of gifts to one person, you must file a gift tax return and either use part of your “lifetime credit” or pay the gift tax. (A further discussion beyond this is above the scope of this blog post.)

Note that gift tax is paid by the giver, not by the person who received the gift.

Spousal Exception

No gift tax is owed on gifts given to spouses. You can give an unlimited amount of gifts to your spouse without any worries about gift tax.

For couples in same-gender marriages, gift tax could have been a problem before DOMA was struck down, because DOMA prohibited the federal government from recognizing same-gender marriages.

What is a Gift?

It’s not just something you wrap up with a bow and put under the Christmas tree for someone at Christmastime.

With gift tax, we’re often talking about property transfers.

Example 1:

Alex and Ethel are married. Alex owns a house worth $100,000. For purposes of this example, let’s assume that there’s no mortgage on the property. Alex puts Ethel’s name on the title to the property. Under tax law, Alex is considered to have made a $50,000 gift to Ethel. But because spouses can give unlimited amounts of gifts to each other, gift tax doesn’t apply.

Example 2:

Same as Example 1, except Alex and Ethel aren’t married. In this case, Alex is considered to have made a $50,000 gift to Ethel, and Alex would need to file a gift tax return and either use part of his lifetime credit or pay gift tax on the transfer. 

When DOMA existed, Example 2 applied to same-sex married couples. Now that DOMA is gone, same-sex married couples fall under Example 1.