Gay and lesbian married couples have an opportunity to revise their previously filed tax returns for any year in which they were legally married and where the tax year is still open under the statute of limitations for refunds. Generally, the statute of limitations runs three years from the original due-date of the return (usually April 15th), or three-years from the date the return was actually filed if the taxpayers requested an extension. Within this three-year statute of limitations, taxpayers can seek additional refunds from the IRS. The IRS has also stated that same-sex married couples are not required to amend their previously filed returns, in their frequently asked questions for same-sex married couples, Q&A #2.
I spoke with Cynthia Leachmoore, an enrolled agent in Soquel, California, for her insight into some of the tax issues that same-sex married couples face when deciding whether to amend previously filed tax returns.
We'll start with some issues that are applicable to amended returns in general, and then move on to tax issues that may be more specific in nature.
An amended return is a new and correct Form 1040 along with a Form 1040-X. The Form 1040-X shows changes between the original tax return and the corrected tax return. Usually people file amended returns to make corrections to their original return. In the case of same-sex married couples, amendments would be filed to correct the filing status because the IRS did not previously allow same-sex married couples to file as married. Along with choosing a new filing status, same-sex married couples will need to make any corrections to income or deductions and recalculate their tax. If the couple decides to file jointly, they would combine their two single tax returns into one jointly filed return.
Amended returns need to be mailed to the IRS, and the IRS usually processes amended returns in about 8 to 12 weeks. However the IRS can take longer to process amended returns during especially busy periods or if the amended return is more complex.
Same-sex married couples should analyze whether they will pay more federal income tax, or less, or about the same by amending their return. "A perfect place to look is the federal return included with their state return," Leachmoore said, as same-sex married couples often filed two single tax returns with the IRS and a joint return with their state. Couples can compare how income, deductions, and tax calculations differ between the two single returns to how it looks on the joint federal return. This will reveal differences in how their federal tax is calculated. Leachmoore recommends that same-sex couples may want to take into consideration the following factors when deciding to amend:
- "How much money is involved in the refund?"
- "How much will it cost" to prepare the amended return?
- Are they willing to give the IRS "extra time on the statute of limitations" to audit the return?
For couples who decide to file jointly, the task is to combine two previously filed returns into one jointly-filed return. Instead of amending both returns, they'll file just one amendment. "Pick one spouse's return and amend," Leachmoore said. For same-sex couples who filed jointly on their state return, they would use the copy of the federal return they included when they filed their state return the previous year and then show the changes between that joint return and one of the spouse's previously filed return. Leachmoore notes that there may be "differences such as prior basis and other carryovers that may not be accurately reflected on the state pro forma 1040 of the federal return."
Besides these general issues, here are some specific issues to consider.
Do you really want to file jointly?
Married couples who file jointly are each responsible for the accuracy of the tax return and the payment of the tax. Now, in the case of same-sex married couples, we're really talking about filing amended returns to receive refunds. The tax has already been paid. So it seems this could be an irrelevant issue for most couples who are thinking about amending. However, if the IRS later audits the amended return and finds there's unreported income or an incorrect calculation of tax, both spouses will be responsible for paying any additional tax, penalties and interest. Accordingly, spouses should be diligent in making sure their income and deductions are reported properly. In the Instructions for Form 1040-X, the IRS advises, "Generally, if you file a joint return, both you and your spouse (or former spouse) have joint and several liability. This means both of you are responsible for the tax and any interest or penalties due on the return, as well as any understatement of tax that may become due later. If one spouse does not pay the tax due, the other may have to."
Analyze the tax impact. There are several factors that interact with each other that may produce higher or lower taxes, depending on each couple's financial situation. Leachmoore groups the factors into the good, the bad, and the ugly.
The Good: Factors that may lower your federal tax when filing jointly
- If the two separate returns were filed using the Single filing status and there were no allocations of income or deductions using community property rules.
- If one spouse is a self-employed, high-income earner and had to allocate self-employment income and self-employment tax to a lower-income spouse.
- There were significant tax-deductible expenses paid by one spouse on behalf of the other spouse, and neither person took a deduction on their original tax returns.
- At least one spouse has a lot of separate property and the couple lives in a community property state.
- "The couple lived in a separate property state, and would greatly benefit by filing jointly due to disproportionate incomes."
The Bad: Factors that might not favor amending the return
- At least one spouse filed as head of household.
- One spouse claimed the adoption credit for adopting the other spouse's child.
- Each spouse claimed capital loss deductions or passive activity losses.
- One spouse claimed the earned income credit.
- One spouse claimed other tax credits or deductions that are dependent on adjusted gross income.
- The couple is subject or becomes subject to alternative minimum tax.
The Ugly: Factors that strongly suggest amending might increase your federal tax
- Spouses are middle-income earners but when their incomes are combined they would be in a higher tax bracket.
- Spouses are higher-income earners, and when their incomes are combined they would be in a higher tax bracket.
- Spouses have two or more homes where the combined mortgage loan balance for all the homes is over $1 million.
- Tax returns that are better left alone.
A common theme running through some of these factors is how married people calculate their deductions. For capital losses, single filers can deduct up to $3,000 in losses. But a married couple can deduct only $3,000 in capital losses as well. So if each spouse had $3,000 in capital loss deductions (for $6,000 in loss deductions for the both of them), they would be limited to just one $3,000 loss for the year, with the remainder carried over to future years. Similarly, some tax credits and deductions are available only within certain income ranges, and combining both spouses income might put them over the limit for a particular tax break.
Deducting Spousal Health Insurance Benefits Paid with After-Tax Dollars
One spouse may have paid income tax, Social Security tax and Medicare tax on group health insurance coverage for that person's same-sex spouse. The IRS says that "the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee's spouse been recognized as the employee's legal spouse for tax purposes. This claim for a refund generally would be made through the filing of an amended Form 1040" (Q&A 10, see also Q&A 11 and 12). The only problem: there's no line on the Form 1040 for indicating making this correction.
So I asked the IRS where people should show this revision for the health insurance benefits. Eric Smith, in the IRS's media relations department, said:
"We don't have any special instructions at this point beyond what's in the Qs/As. Amended returns are filed using Form 1040X. The Qs/As have a link to an overview of the amended return procedure at http://www.irs.gov/taxtopics/tc308.html.
"A change to the amount of a taxpayer's wages means that the adjusted gross income will change. So Line 1 on Form 1040X will need to be completed and other lines will likely also be affected. See the instructions to Form 1040X, generally, as well as the line instructions at http://www.irs.gov/instructions/i1040x/ch02.html#d0e699
"As with any amended return, the description of the change or changes in Part III is very important. See http://www.irs.gov/instructions/i1040x/ch02.html#d0e2061"
Document and Explain
Leachmoore also cautioned that taxpayers should "be really clear" when providing an explanation of the changes on their amended return. Documentation will help the IRS process the tax return more efficiently.
Leachmoore observed that the IRS decision to allow gay and lesbian spouses to file as married persons is a welcome change. Clients "don't deserve to have their personal life turned into a knot. It's just insulting," Leachmoore said, referring to the old way of preparing tax returns for same-sex couples.
Cynthia Leachmoore is an enrolled agent in Soquel, California. She can be reached at email@example.com.
- IRS Guidance on Same-Sex Marriage (CCH Tax Briefing, pdf, 6 pages)