Same-sex marriage and taxes

Volume 114, No. 3March, 2014

Michael Chapin

In June 26, 2013, the Supreme Court struck down section 3 of the Defense of Marriage Act (DOMA). The decision has many tax implications. The federal government now recognizes legally married same-sex unions that were performed in states or foreign countries which authorize them. The Internal Revenue Service issued a ruling which clarifies the determination of same-sex marriage status and the effects on tax filings and benefits. The ruling was applied beginning Sept. 16, 2013.

Marriage for federal tax purposes

The IRS recognizes legal same-sex marriages performed in a domestic or foreign jurisdiction that allows them. This applies even if you live in a state that doesn’t recognize same-sex marriage, as long as you were legally married in a state that does. All provisions of the federal tax law regarding marital status apply to all legally married taxpayers.

Like opposite-sex married couples, same-sex married couples must file as “married filing jointly” or “married filing separately.”

The term “marriage” does not apply to registered domestic partnerships, civil unions, or other similar relationships recognized under state law. For federal tax purposes you are considered single.

Marital benefits and tax breaks now available for same-sex marriages

  • Employer-provided benefits are tax-free for married couples, such as health insurance. The IRS has been issuing guidelines for employee benefits affected by the DOMA decision.
  • Child and dependent care credit is generally allowed only if both spouses have earned income. Exceptions are available if a spouse is a full-time student or disabled.
  • Spousal IRA. If a joint return is filed, the lower-earning spouse, even with no earnings, can consider the other spouse’s compensation in making an IRA contribution. This includes a Traditional IRA or a Roth IRA.
  • Joint bank and financial accounts. Married couples can combine their financial accounts with less worry about unintended tax consequences.
  • Gift tax. You may transfer an unlimited amount of money and assets to your spouse without gift tax. Gift-splitting is also available; these are gifts counted as if made by one-half each. Individuals have an annual gift tax exclusion per donee of $14,000 in 2013. Married couples can combine their annual exclusions for each donee.
  • Federal estate tax. The estate of the first spouse to die is entitled to the marital deduction, so most amounts transferred to the surviving spouse are tax free. The estate of the first spouse to die may also be able to transfer the decedent’s unused estate tax exclusion to the surviving spouse.
  • Retirement plans and IRA’s for survivors. A surviving spouse can spread out distributions from a qualified retirement plan or IRA with beneficial rules used for married couples. For instance, if you inherit an IRA from a spouse you can treat the IRA as your own, or choose to be treated as a nonspouse beneficiary instead.

Prior year tax returns

Same-sex spouses who file an original tax return after Sept. 16, 2013 generally must file as married.

Legally married taxpayers may choose to amend their tax return from single to married if the statute of limitations has not expired. Generally the statute of limitations is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. You are not required to amend previously filed tax returns filed before Sept. 16, 2013, unless you choose to.

Why amend?

Depending on the situation, some couples may want to amend earlier tax returns while some might not. If one spouse earns much less than the other, it could be to their advantage to amend from single to married filing jointly. However if both spouses have high income, it may be a disadvantage to amend from single to married.

Here are four areas that might be reasons to amend:

  1. Employee benefits that are excluded from income because of marital status. Employees may amend tax returns to claim a refund of taxes they paid for these benefits. This may include health insurance coverage and cafeteria plans provided for a same-sex spouse.
  2. Capital gains and losses in past years. Losses that would offset your spouse’s capital gains if you had filed a joint tax return could be amended.
  3. Gift tax return. You might want to amend a gift tax return if you made a large gift of assets to your spouse, since the transfer would now be tax free.
  4. Estate tax returns that aren’t past the statute of limitations. You may save a lot of money by filing an amended return.

New York estate tax refund

Since July 24, 2011 estates of same-sex married couples have been allowed to use the same deductions and elections, including the marital deduction, as traditional married couples for New York estate tax purposes. As a result of the DOMA decision, this now includes estates of legally married same-sex spouses who died before July 24, 2011. Taxpayers may amend a previously filed New York estate tax return, where the statute of limitations remains open, to apply for a refund.

Michael Chapin is a long-time tax advertiser in Allegro and is available to work with musicians for all of their tax questions. Make an appointment with him by calling (212) 989-4385.