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Federal Tax Issues for Same-Sex Married Couples

By July 29, 2013

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Same-sex married couples are now considered married for federal tax purposes after the Supreme Court decided that section 3 of the Defense of Marriage Act was unconstitutional in the case of the United States v. Windsor. Previously, such couples were required to file federal tax returns as unmarried persons. I interviewed fellow tax professional and enrolled agent Jason Dinesen in order to write this article.

Going forward, there won't be a distinction made between same-sex married couples and opposite-gendered married couples. If you're married, you're married; that's all that matters for tax purposes. Though, a number of issues come to the surface as tax professionals help their clients transition from one set of rules (being treated as if they were unmarried on their federal tax return) to another (treated as married).

Same-sex married couples and their tax advisors may want to review their tax situation to address the following issues around filing status, health insurance benefits, withholding, amending previous tax returns, tracking carryovers, and tax planning for next year.

Filing Status Issues for Same-Sex Married Couples

Same-sex married couples are now required to file their tax returns using the following filing status options: married-filing-separately or married-filing-jointly. If each spouse maintains separate residences, they may be eligible for head of household. There are pros and cons to each filing status. Filing status impacts a wide variety of tax items, including tax rates, which deductions are allowed, and which limitations apply to various types of deductions.

Filing status could still be an issue for same-sex spouses who live in a state that does not recognize same-sex marriages. We're waiting for the IRS to provide taxpayers with guidance on how to handle this question. In order to address this issue, the IRS can go in two different directions. They could allow such couples to file as married, or they could allow state law to determine the marital status for federal tax purposes. Dinesen points out that in a previous ruling on common law marriages, the IRS ruled that a couple remains married for federal tax purposes even if they move to a state that does not recognize common law marriage (Revenue Ruling 58-66). The IRS will need to be clear how they will handle this issue for same-sex spouses.

Employee Health Insurance Benefits

Health insurance coverage for an employee, the employee's spouse and dependents are paid for using pre-tax dollars. These pre-tax health coverage benefits are excluded from an employee's wages for the Federal, Social Security, and the Medicare taxes. Previously, if an employee covered a same-sex spouse on their group health insurance plan, the value of the benefits provided to the same-sex spouse were added to the employee's wages for the Federal Income tax, Social Security tax and Medicare tax. Going forward such benefits provided to same-sex spouses are excluded from these taxes.

The value of spousal insurance benefits provided can be a retroactive claim of up to three years. Employees who have covered their same-sex spouse have an opportunity to recover federal Income tax, Social Security tax and Medicare tax paid on benefits provided to their same-sex spouse. The IRS will need to provide tax payers information on how to go about recovering the taxes paid on these spousal health insurance benefits.

Withholding

Same-sex spouses may have filled out their Form W-4 to request withholding at the single tax rates. They will want to re-calculate their withholding allowances and to indicate that their employers should be withholding at the married tax rates. Dinesen recommends, "Looking at the mock federal return to see what their joint tax liability might be." Then, work from there to determine what their level of withholding should be.

Amending Previous Filed Tax Returns

Same-sex married couples can file amended returns to correct their previously filed two single returns into one joint federal return or two married-filing-separate returns. Dinesen points out that amended federal returns are ready to go, since same-sex married couples already have a mock federal return which was used when preparing their previous state return.

Taxpayers have three years from the original filing deadline to submit a revised tax return and still be eligible for a refund from the IRS. That means, as of July 2013, tax returns for the years 2012, 2011, and 2010 are open for refunds. Tax returns for the years 2009 and earlier are closed to refunds, unless the taxpayers previously filed protective claims to keep the statute of limitations open. This three-year statute of limitations could open "a big can of worms," Dinesen observed, considering that same-sex marriage has been legal since 2004 when Massachusetts first allowed same-sex partners to marry.

"I'm guessing there are plenty of people who have submitted amended returns," Dinesen speculated, "so the IRS will need to address the issue [of filing amended returns] very soon." In particular, we are looking for the IRS to provide any guidance on how to make amended returns easier for the IRS to process.

Look at Differences between Federal and State Carryovers

Because same-sex married couples had to file single on their federal return and married on their state return, there may have been differences in amounts that are carried over from one year to the next. For example, couples may have been eligible to deduct their traditional IRA contributions on their two single federal returns, but on their joint state return their combined income may have been high enough to make their IRA contributions non-deductible. That is, couples may have cost basis in their IRA for state tax purposes, but a possibly zero cost basis for federal tax purposes. This very likely creates a permanent difference between their basis for federal and state calculations. If so, such basis information should be retained in the spouse's permanent records, as IRA basis will determine the extent to which their IRAs taxed upon distribution.

Similarly, same-sex spouses may have different capital loss carryovers on their federal and state returns. Previously, each spouse may have been able to claim up to $3,000 in capital losses on each of their single, federal returns. But on their joint state return, they were allowed only one $3,000 loss. As such, couples may have capital loss carryover amounts that are different on their federal and state returns. The same applies for passive activity loss carryovers.

Tax Planning for 2013

There are differences in the way single persons and married persons are treated when it comes to various types of deductions. Same-sex spouses will want to review any of these differences to see how it will impact the calculation of their federal income tax. This includes:

  • Capital loss limitations: $3,000 on a joint return, or $1,500 separate returns
  • Passive activity loss limitations: phase-out is based on combined income
  • Social Security benefits: taxable amount is based on combined income
  • Student Loan Interest Deduction: $2,500 limit on a joint return, deduction not available for separate returns
  • Spousal IRA for nonworking spouse
  • Earned income credit, Child Tax Credit, dependent care credit may not be available, as combined income might be too high for these tax benefits. Same-sex spouses "cannot swap the kids around" to optimize their federal tax return based on which spouse claims the dependents.
  • Related party rules for limiting losses: in the past, same-sex spouses were unrelated to each other for federal tax purposes, but now they are related by marriage. We'll no longer be able to engage in loss transactions by having one same-sex spouse sell assets at a loss to the other spouse.
  • Alimony: If a same-sex couple is divorced, alimony payments are deductible to the payer and taxable income to the recipient. Previously under DOMA such payments were not deductible.
  • Pension distributions, such as from a 401k or IRA, can now be rolled over to the surviving spouse's account instead of being distributed within five years.

In summary, same-sex spouses will want to review, in detail, their previous tax returns for amendments and discrepancies caused by changes in the new tax laws and Supreme Court ruling, in order to properly plan for their future tax returns. Some of the issues to check include:

Previous Years

  • Deducting health insurance benefits provided to same-sex spouse.
  • Deducting alimony paid to same-sex ex-spouse.
  • Reporting alimony received from same-sex ex-spouse.

Future Tax Returns

  • Adjust withholding for marital status and withholding allowances.
  • Keep an eye on health benefits to make sure the employer moves spousal benefits into pre-tax deductions.
  • Check differences between federal and state tax returns for capital loss carryovers, passive activity loss carryovers, IRA basis.
  • Pension and IRA distributions from a deceased spouse can be rolled over to the surviving spouse's account. No longer need to cash out the retirement account within five years, as is the case for non-spousal beneficiaries.

 

Jason Dinesen is an enrolled agent in private practice in Indianola, Iowa. He can be reached at dinesentax.com.

Comments
July 30, 2013 at 9:54 pm
(1) John R Dundon II EA says:

The IRS has as of yet come out with guidance on its definition of filing status relative to Marriage as now understood via the Windsor case. The fact is that the President has asked the Justice Department to ‘work with’ the IRS to apply the facts of Windsor relevant to the definition of marriage systematically. AS OF TODAY THE IRS STILL DEFINES MARRIAGE AS BETWEEN A MAN AND A WOMAN WHEN IT COMES TO FILING STATUS FOR FEDERAL INCOME TAX PURPOSES. The pace with which the IRS moves leads me to believe that for tax year 2013 income tax filing purposes that definition won’t be changed by the filing deadline of April 15th 2014. Furthermore they have provided absolutely no guidance on filing amended returns for past tax years in these regards. They still have to figure out if marriage is determined based on state of celebration or state of residency. So I think this pose gets the cart in front of the horse a little in my opinion.

July 31, 2013 at 5:00 pm
(2) Jeanine Buben-Croy, MT, EA says:

I agree with John Dundon, EA! I just attended the annual two-day Tax Institute in Denver, where we constantly discussed the DOMA ruling and the issues that IRS says they are working on guidelines for. We discussed the issue at the annual Colorado Practitioner-IRS Liaison meeting as well. There are MANY ISSUES around the definition of marriage that have not been clarified. IRS is slow to respond and provide us with guidelines. Things are complicated by the fact that many states do not recognize same-sex marriages. Furthermore, many of the states recognize civil unions and domestic partners, but not same sex marriages. Will we treat these “almost marriage” legal partnerships as marriages for federal tax purposes? What if the couples were married in a state that allowed and confirmed their unions, but then moved to a non-marriage state? None of this is likely to be clarified by Congress or the IRS by the upcoming tax season. Tax accountants and tax preparers, and our same sex couple clients, are left in an unfortunate holding pattern. I look forward to the day when the entire marriage issue is uniform for federal, state, and local tax purposes. The law has always lagged behind social needs and conditions, but clarification of the issues for tax purposes is way overdue. Uniform definitions would help tax professionals to serve all of our married clients in the optimal way!

September 9, 2013 at 3:43 pm
(3) Fred says:

as of this date, many of the issues noted by the previous commentors are much better defined:
http://www.irs.gov/uac/Newsroom/Treasury-and-IRS-Announce-That-All-Legal-Same-Sex-Marriages-Will-Be-Recognized-For-Federal-Tax-Purposes;-Ruling-Provides-Certainty,-Benefits-and-Protections-Under-Federal-Tax-Law-for-Same-Sex-Married-Couples

A marriage in a state that allows for same-sex marriage is the definition for filing jointly. The couple does not have to be living in that state to file jointly.

December 1, 2013 at 4:53 pm
(4) tdmr says:

For those couples of the same sex married 2013: Disregard the above comments. The IRS has determined that married same sex couples are to receive all rights and privileges with regard to filing taxes….. Alos important to note, if you marry ion 2013 you can also ammend your taxes/ file jointly and ammend taxes for the past 3 years… sometimes that is an advantage/ sometimes not/ in my case it will save us approximately 30, 000 dollars.

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