While approximately 10,000 cases are appealed to the U.S. Supreme Court each year, only 75 to 80 make it to oral argument. Of those 75 to 80 cases, there are usually only a few that grab the media’s attention. This newsletter highlights three landmark decisions handed down in 2015— Comptroller v. Wynne, King v. Burrell, and Obergefell v. Hodges—that could affect how your clients are taxed, pay for healthcare, and plan their estates.
Comptroller v. Wynne – A State Can’t Double-Tax Income Earned Outside of the State
Legal Issue: Does Maryland’s state income tax scheme violate the U.S. Constitution by “double taxing” a resident’s income earned from economic activity in another state that also taxes the same income?
Decision, 5 – 4: In a taxpayer friendly decision, the Supreme Court ruled that Maryland’s “double taxation” scheme violates the dormant Commerce Clause of the Constitution.
This case involved a Maryland couple, the Wynnes, who owned stock in a Maryland S corporation that did business in 39 states. Since income generated by an S corporation is passed through to its shareholders, the Wynnes paid income taxes in Maryland as well as their pro-rata share of taxes on the income the corporation earned in the other states.
In Maryland, residents are subject to a state income tax as well as a “local tax” based on the city or county in which they live. Prior to the Wynne case, the state allowed residents to take a credit against the Maryland state tax to offset a similar tax paid to another state, but it did not allow a credit to be taken against the local tax. Thus, the income of a Maryland resident earned outside of the state was “double-taxed” by being subject to (1) out-of-state taxes, as well as (2) the local city or county tax. The U.S. Supreme Court struck down this “double taxation” scheme, holding that because the dormant Commerce Clause gives Congress power over interstate commerce, Maryland could not hinder interstate commerce by offering a credit against state income taxes but not against local income taxes.
As a result of the Wynne decision, Maryland owes the Wynnes and other similarly-situated taxpayers refunds and interest totaling about $200 million. In addition, in 2015 and future years, an estimated 55,000 Maryland residents will be able to claim deductions against both state and local income taxes to compensate for income taxes they pay out of state.
Planning Tip: While the Wynne decision involved a Maryland double-taxation scheme, the ruling will potentially affect hundreds of other cities, counties and states, such as Indiana, New York, and Pennsylvania. Clients who pay income taxes in multiple states that may be affected by the Wynne decision should seek qualified tax advice regarding filing protective claims (such as amended returns or requests for refunds) for tax years in which the statute of limitations has not run.
King v. Burrell – Obamacare Subsidies Are Available to All
Legal Issue: Can the IRS extend tax-credit subsidies to healthcare coverage purchased through exchanges established by the federal government under provisions of the Patient Protection and Affordable Care Act (the “Affordable Care Act,” or “ACA,” commonly referred to as “Obamacare”)?
Decision, 6 – 3: Yes, Obamacare subsidies are available to individuals who obtain their healthcare coverage through a state or federal exchange.
Buried in the 2,700-page Affordable Care Act is a provision which states that tax-credit subsidies are available to individuals who sign up for healthcare coverage “through an exchange established by the state.” After the ACA was passed, 34 states opted not to establish their own healthcare exchanges, leaving their residents to use the federally-established healthcare exchange to obtain their coverage. The King case challenged the validity of federal subsidies given to these residents since the ACA appeared to limit subsidies only to individuals who relied on a state-established exchange. Writing for the majority, Chief Justice John Roberts stated, “We doubt that is what Congress meant to do.” Thus, the Supreme Court upheld the validity of subsidies given to residents of the 34 states that use the federal healthcare exchange.
Planning Tip: While there are still several cases challenging parts of the ACA winding their way through the U.S. court system, the King case was the linchpin to upholding the law. Nonetheless, with not one Republican voting for Obamacare and the 2016 presidential election fast approaching, advisors need to be aware that the Obamacare debate will not be disappearing any time soon but will continue to be hashed out in the political arena.
Obergefell v. Hodges – Same Sex Marriage is Legal Everywhere in the United States
Legal Issue: Does the Fourteenth Amendment of the U.S. Constitution require a state to license same sex marriages and recognize same sex marriages that are legally licensed and performed in another state?
Decision, 5 – 4: Yes, same sex marriages are legal and must be recognized everywhere in the United States.
The Obergefell case involved the consolidation of four cases that challenged state-banned recognition of same sex marriages in Kentucky, Michigan, Ohio and Tennessee. The Supreme Court had three choices to make with regard to same sex marriage: (1) overturn state bans; (2) uphold state bans; or (3) uphold state bans but require states to recognize marriages legally performed in other states. Relying on the Due Process and Equal Protection Clauses of the Fourteenth Amendment, the Court held that marriage is a fundamental liberty and denying the right of same sex couples to wed would deny them equal protection under the law.
Planning Tip: Aside from kids, career directions, religious beliefs and where to live, same sex couples who are considering marriage need to determine if they will commit how to handle money, debt, and related matters into writing with a prenuptial agreement. Same sex couples who are already married need to determine if their prenuptial agreement should be revised and if their estate planning documents need to be amended in light of the Obergefell decision’s nationwide authorization of same sex marriage.
The Bottom Line on the Wynne, King and Obergefell Decisions
Although the latest session of the Supreme Court has come to an end, how the Wynne, King and Obergefell decisions will affect the counseling advisors offer to their clients with regard to tax planning, financial planning, premarital and postmarital planning and estate planning has just begun. We are available to answer your questions about these landmark cases and how they will affect your clients.
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.