by Richard S. Schwartz CPA. CVA
NOTE: On August 29th,the IRS announced that all legal same-sex marriages will be recognized for federal tax purposes.
In June 2013, the US Supreme Court overturned Section 3 of the Defense of Marriage Act (DOMA), which defined a marriage as a union between a man and a woman for federal purposes. With the historic June 2013 decision, same sex married couples (SSMC’s) have been granted the same federal rights, privileges, and protections as heterosexual married couples in states where same sex marriages are recognized. However, Section 2 of DOMA was not overturned – leaving the decision to allow same sex marriages to be determined at the state level. Currently, 13 states recognize same sex marriages: CA, CT, DE, IA, MA, MD, ME, MN, NH, NY, RI, VT, and WA, as well as the District of Columbia. However, please note that this new ruling does not apply to registered domestic partnerships or to civil unions that are recognized under state law.
In addition to numerous benefits such as health insurance, retirement and social security, the new law also extends to income taxes. On August 29, 2013 the IRS announced that all same sex marriages that were legally recognized in a state that allowed same sex marriages will be treated as married for federal tax filing purposes, regardless of the state where the couple currently resides. For example, if the couple were legally married in a state that allowed same sex marriages but now the couple resides in a state that does not recognize same sex marriages, for federal income tax purposes, the marriage will be recognized.
The new ruling also allows SSMC’s to amend prior years’ tax returns allowing the couple to file jointly. Filing an amended tax return is not required. SSMC’s would need to consult with their tax preparers to determine on an individual basis if amending past years’ tax returns would be beneficial or not. A taxpayer can go back three years to file an amended tax return, opening the door to amend tax years 2010, 2011, and 2012 (as well as 2009 if you had filed an extension for that year).
Generally, married taxpayers would benefit by filing a joint tax return when one spouse earns significantly more income than the other spouse. Another situation that would prove tax advantageous for a couple to file an amended prior year tax return would be when one taxpayer had his partner included on his employer sponsored pre-tax health insurance plan resulting in his federal wages reported on his W-2 being increased by the financial benefit provided the spouse. Those incremental wages would now be pre-tax.
However, there are also “pitfalls” to be aware of when amending the tax return. For example, if one spouse had claimed the adoption credit when adopting the other spouse’s child, that credit would need to be recaptured and would no longer be allowed if amending to a joint tax return. Another example would be when spouses own rental properties where the passive activity tax rules could significantly affect prior years’ income as well as tax carry forward information when amending to a joint tax return.
Finally, beginning with the 2013 tax year, SSMC’s will no longer be able to file as single or head of household filing status for federal tax purposes. The result of filing jointly or married filing separate could have a significant adverse federal income tax impact for many SSMC’s due to the “marriage penalty”. Therefore, as soon as possible, SSMC’s should project their 2013 tax liability based upon their new federal tax filing status in order to prevent any year end “surprises”. Determining their 2013 joint tax liability now as opposed to next winter, will allow SSMC’s to make any necessary adjustments to their federal income tax withholdings and federal estimated tax payments sooner rather than later.