Posted by: captainfalcon | December 14, 2011

How DOMA confers a benefit on gay people

[Update: This is an excellent explanation of the phenomena of the marriage penalty/bonus.]

Here’s a cheeky tax fun-fact, wholly unoriginal to me, that I’ve meant to post about for a while. It concerns the Defense of Marriage Act’s effect on income assignment within gay couples.

Congress allows “income assignment” within a married couple. That is, for federal income tax purposes, the higher-income spouse is permitted to deem that income he earns is actually earned by the lower-income spouse. This typically confers a tax benefit on the married couple because it enables the superior earner to report less income, and thereby escape a higher tax bracket. Overall, the married couple has to pay less tax on the money it jointly earns.*

The most preferable tax treatment is for a couple to be able to split their income (e.g. if A earns $100,000 and B earns $0, to be able to report that A and B both earn $50,000). This minimizes the greatest amount a spouse has to report, and thereby ensures that both spouses land in the lowest possible income bracket their total collective income allows. Federal law — through a complicated set of deductions, inclusions and exclusions of income — disallows this. No spouse can assign half of his income to the other spouse.

Gay couples, on the other hand, can take advantage of income-splitting. Section 3 of DOMA globally defines marriage as the union of a man and a woman for purposes of all federal law (it is situated in 1 U.S.C. § 1, where definitions that apply across the entire federal pandex live). This means that the Internal Revenue Service cannot recognize gay couples as married, and so cannot subject them to the limits on income assignment that apply to heterosexual married couples. But an Obama Administration Revenue Ruling — which, were DOMA repealed, would be preempted by the broader federal marriage regime — holds that gay couple are to enjoy the same income-assignment privileges as they enjoy under state law. (See this half-inaccurate account.) In California, a “community property” state that treats couples’ income as earned by the couple as opposed to by the individual who actually earns it, this permits gay couples to split their income for federal income tax purposes.

This is how DOMA confers a benefit on gay couples.

*This is not always true. Because marginal rates are progressive, bumping a high-income spouse into a lower tax bracket does not necessarily offset  the low-income spouse’s graduation into a higher tax bracket. For some married couples — those who have approximately equal income — there is what’s called a “marriage penalty.”

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