The Supreme Court has found that Section 3 of the Federal Defense of Marriage Act violates the U. S. Constitution of those legally married under the laws of their state. The decision provides same-sex married couples with the same federal tax related benefits afforded to opposite-sex married couples. While the Supreme Court did not extend laws of same-sex marriage nationwide, federal income tax rules which allow for the filing of joint income tax returns are now afforded to those legally married under the laws of their state. There is an unresolved issue of whether recognition or non-recognition of a same-sex marriage in the state of residency of the couple reside controls how the IRS will treat them for tax purposes.
From a tax perspective, one of the key elements of the taxpayer’s filing status is their marital status. There are five filing statuses: single, head of household, a surviving spouse, married filing jointly and married filing separately. It is the filing status that determines the tax rates, amounts of personal exemptions and standard deduction. Therefore, there could be a significant change in the way 2013 income tax returns are prepared and filed. Eligible taxpayers need to review the status of prior returns, and if eligible, may want to consider the filing claims for refunds for prior return years still opened under the statute of limitations.
Some couples may want to continue to keep finances separate and will file separate income tax returns. For these taxpayers, most, but not all, will pay more income tax because the tax rates for married filing separate returns are higher than rates for those filing as unmarried or head of household. Another consideration is that taxpayers filing joint returns are responsible, jointly, for tax, interest and penalties calculated on a joint return, no matter which party actually generates the tax.
Several of the itemized deductions shown on tax returns are subject to levels of adjusted gross income. Common expenses include medical expenses, casualty losses and miscellaneous itemized deductions. As incomes are increased due to filing of a joint return, the thresholds of deductions will rise accordingly. Capital losses not used to offset capital gains are also limited—to $3,000 per year whether the return is filed as a joint return or as an unmarried single return. (Returns filed as married filing separately are each limited to a $1,500 capital deduction loss.).
Certain tax benefits, such as the total amount of itemized deductions taxpayers are eligible to claim, the amount of personal exemptions are lost if income levels exceed certain amounts. The amount of income is also used to determine the tax rate on net capital gains, and whether the net investment income on a return is taxed at an additional 3.8 percent.
Other tax benefits, such as the American Opportunity Tax Credit, the Lifetime Learning Credit, IRA withdrawals for educational purposes, taxation of retirement type benefits, to name a few, could be beneficial to same-sex married couples.
In addition to the income tax items mentioned, there are significant other benefits available, including the utilization of the Estate Tax Marital Deduction and Gift Tax benefits of joint gifts, as well as “portability” of the estate tax unused exclusion amount eligible estates.
Employee benefits and their tax implications to same-sex married couples should not be overlooked. Under some circumstances, the employer cost of adding the same-sex spouse to a health insurance policy created taxable income to the employee. In addition, DOMA previously excluded the benefits of flexible spending accounts and similar arrangements. Commentary suggests that employers in states that allow same-sex marriages will have to amend plans to cover all participants. IRS guidance is expected to assist employers with proper administration of the new rules.
Twelve states and the District of Columbia recognize same-sex marriage, and seven more states recognize same-sex unions or domestic partnerships. While Alabama is not one of the states, employers should know the affect of the law to properly administer its programs if you have employees in other states. Those states recognizing same-sex marriage are Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington. The states recognizing same-sex unions or domestic partnerships are California, Colorado, Hawaii, Illinois, Nevada, New Jersey, Oregon and Wisconsin.
The tax implications will continue to develop over time, as well as the number of states to which the concepts apply.
© 2013 L. Paul Kassouf & Co., P. C. Gerard J. Kassouf, CPA is a director of the Birmingham, Alabama firm of L. Paul Kassouf & Co., P. C., Certified Public Accountants and Business Advisors. He can be reached at gkassouf@kassouf.com.
