Marriage Equality Decision and Tax Implications

A Supreme Court finding of a constitutional right to same-sex marriage would simplify the tax filing process for married same-sex couples and reduce the compliance burden.

 The Supreme Court is set to rule in late June on a case involving four statewide bans on same-sex marriage (Obergefell v. Hodges). If the Court finds same-sex marriage bans to be unconstitutional, thousands of households in Kentucky, Michigan, Ohio, and Tennessee could get relief on completing their tax filings. For the first time, married same-sex couples in these states would be able to file their state tax returns using a “married” filing status. This change could dramatically simplify their tax filing process and reduce what’s known as the “compliance burden” – the time and money spent to comply with federal tax rules and regulations.[1]

In total, an estimated more than 223 thousand households across 13 states could see a reduction in tax filing burden. In addition to the four states listed in the case, 9 other states that don’t currently recognize same sex marriage are likely to follow the decision from the Supreme Court case. Table 1 shows the number of same-sex spouse households by state that could be impacted.

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State and Federal Tax Filing Requirements

According to IRS statistics, of the 56 million tax returns filed by married couples in 2012, only 4.7 percent belonged to twosomes who filed separately. This shows that when a married couple is given the choice of filing either jointly or separately, they overwhelmingly choose to file jointly. Assuming this federal filing pattern holds true at the state level, the majority of same-sex married couples will file one state return jointly instead of two separate returns. This outcome could reduce by almost half the number of state filings in the affected areas by those in same-sex marriages.

An additional tax preparation burden on same-sex married couples stems from having to file under a married status for their federal returns and under a non-married status at the state level. The result can be a “five tax return couple,” where each spouse prepares but does not file a “dummy” individual federal return, each spouse files an individual state return, and the couple files a joint federal return. David Williams, Chief Tax Officer at Intuit notes, “A decision in favor of same-sex marriage could cut the tax prep time burden in half for some same-sex married couples.”

Tax and Financial Implications

The impact of the Supreme Court decision will reach beyond the tax filing compliance burden, also affecting the tax and financial situations of thousands of households. Same-sex married couples would be subject to “marriage penalties” and/or “marriage bonuses” just like married couples today, which could increase or decrease their tax burden. For example, filing married could change the couples’ tax rate or their eligibility for deductions. The article “Seven tax tips for newly married couples” sheds light on the considerations involved and can help families navigate the changes. Couples who are filing married for the first time should also explore the tax implications of filing joint versus filing separate to optimize their financial situation. Additional areas of taxes and finances that may be impacted include the following:

  • Inheritance taxes (Kentucky, Nebraska & Tennessee)
  • Costs associated with estate planning and tax preparation
  • State taxes on spouse’s benefits (for example, if a same-sex married couple lives in a state which does not recognize same-sex marriage and one spouse is covered on the other’s employer sponsored health insurance, the value of the benefits for the non-employee spouse is taxable income for the state tax return)
  • Outlay of state benefits (for example, the income of both spouses would be counted on applications for assistance)
  • Health insurance through spouse’s employer (usually employer plans offer lower costs than what can be found in the open market)

Stay Tuned

For same-sex married couples, in addition to the social and political implications of the Supreme Court decision (such as access to medical information and visitation rights for spouse and children), a court ruled change would reduce their tax compliance burden and impact their tax and financial situations. The Supreme Court’s decision likely won’t be announced for several more weeks, but in the meantime same-sex married couples can check out tax tips on our previous post Tax Tips for Gay and Lesbian Couples Post-DOMA.

Notes on Unique State Tax Situations
Tax laws differ by state and the tax burden reduction depends on state-by state situations. Missouri’s property tax laws follow federal laws and thus for filing status the tax code recognizes same-sex marriages by default. Tennessee only taxes interest and dividends. Texas and South Dakota have no state income tax on individual income.
[1] Note: Tax compliance or preparation burden is different than tax burden. The time and cost of preparing and filing tax forms constitutes the compliance burden. Whereas the tax burden or liability is calculated, in part, based on filing status, countable assets, and qualifying credits and deductions.