The 2014 tax season marked the first time in U.S. history that married same-sex couples were allowed to file their federal tax returns using a “married” filing status. This was a result of the U.S. Supreme Court’s landmark decision in United States v. Windsor, which held that the federal government’s heterosexual-only definition of marriage under the Defense of Marriage Act (DOMA) was unconstitutional. Interestingly, not only was it the first time same sex couples could file married for their federal returns: they were required to do so, if indeed, they were married, even if they live in a state that still does not recognize their marriage.
Although gay marriage has existed now for over 10 years in some states and is increasingly accepted, only 17 states plus the District of Columbia currently allow same-sex marriage (referred to as “recognition states”). However, since Windsor became the law of the land, the IRS has decided that it will recognize all legally-married same sex couples for all federal tax purposes irrespective of where they reside. States that still do not recognize same-sex marriage are referred to as “non-recognition” states. The landscape is changing quickly, but, until the Supreme Court weighs in on the issues again, we are likely to have a ‘patch-work’ effect among the states of different legal recognition for same sex married couples.
While a married filing status provides certain benefits, it also raises concerns for same-sex couples. Here are some tips for gay and lesbian couples in considering the effect of marriage on their federal income, gift and estate tax plans:
Tip No. 1: Decide whether to file Jointly or Separately.
Effective in 2014 all married couples must file their federal income taxes as married. They may choose whether to file jointly or separately: Married Filing Jointly (MFJ) or Married Filing Separately (MFS).
MFJ requires couples to file one tax return, and usually results in a higher tax bill affectionately dubbed the “marriage penalty.” Only where there is a disparity between the two spouse’s incomes, such as with a stay-at-home spouse with little or no income can marriage result in a lower tax bill.
Under MFS, each spouse files a separate tax return. MFS usually results in higher tax bills. It has become somewhat of an ‘urban myth’ that separate puts you back to single. Not true. MFS status is usually disadvantageous because certain deductions and credits are unavailable to MFS filers, while others are available only at income levels which are low compared to if filing jointly.
Tip No. 2: Consider amending prior years’ income tax returns to reflect a married filing status.
Gay and lesbian couples who were married in prior tax years may be able to obtain a refund if such prior year’s tax bill would have been lower had they filed as married. But you must act quickly. A federal tax return may be amended only if the original filing date was less than three years ago.
Keep in mind that amending the filing status on a prior return (from single to married) is allowed only if the filers were already married, or became married, during the tax year in question. (Marriage status for federal filing purposes depends on your legal status on December 31st of the filing year.) Therefore a same-sex couple that married in 2012 may seek a married status only for tax years 2012 and later. Eligible couples should run the numbers both ways to see if their tax bill would have been lower had they filed as married.
And, you don’t have to amend every prior year: only those that would indeed be beneficial!
Tip No. 3: Amend prior income tax returns that reported employer-provided health insurance contributions to a spouse as income.
Employer contributions to a spouse’s health insurance are deductible from income. Under DOMA, the value of a spouse’s health insurance benefit was treated as income and taxed. This is another possible source for refunds via amended tax returns for same-sex couples.
Tip No. 4: Revisit tax plans if you are planning to sell (or recently sold) your residence.
Taxpayers who have sold their principal residence receive the first $250,000.00 from the sale tax free. However, married couples filing jointly may double that amount – even if only one spouse actually bought or paid for the home. For couples selling highly-appreciated property, this represents significant tax relief. Couples that sold such a property in recent years should consider filing an amended return if they are eligible. Again, eligibility depends on having been married!
Tip No. 5: Update estate plans that are affected by estate tax rules applicable to married couples.
Wealthy couples must consider estate taxes in their plans. For tax year 2014, taxpayers will face federal estate taxes if their estate has a value greater than $5.34 million for an individual’s estate and, or $10.68 million for a married couple’s estate. Many states, however, have a state estate tax that kicks in usually at a much lower level, like the $1 million estate size in New York, Massachusetts and D.C. Same-sex couples should plan accordingly now that they are treated as married under federal law.
Tip No. 6: Revisit strategy for gifting money.
Gift taxes apply to large transfers of wealth between individuals. An individual may give up to $14,000 per year/per person without incurring gift taxes. A married couple may double that amount. Married same-sex couples may now give using the married-level exemption.
Regardless of a gift’s amount, gift taxes do not apply to transfers made between spouses. This is a handy tool for individuals paying large sums of alimony to a former same-sex spouse. If gift tax returns were filed for amounts paid on transfers between same-sex spouses in recent years, including alimony, you should consider filing an amended return.
Tip No. 7: Figure out which forms you will need to complete for future tax returns.
Among the most frustrating questions facing married same-sex couples living in non-recognition states is how to reconcile their federal and state tax filings. This is especially problematic in non-recognition states where the state tax return references the federal return. Couples in these states may need to fill out up to five returns to complete there tax filings! Until non-recognition states offer further guidance, married same-sex couples must bear the increased costs and hassle required by this process. Certain software programs can ease the burden, including Turbo Tax®.
Tip No. 8: Use Updated Software!
Few tax software makers are keeping up with the dynamic changes in the law in this area. Turbo Tax® is one of them. Be sure to check that your tax preparer or software is updated for the latest information on the filing requirements, both state and federal, for same-sex married couples.
- Scott is the founder of a boutique estate planning law firm in Boston, Squillace & Associates, P.C. (www.squillace-law.com) and is recent author of “Whether to Wed: A Legal and Tax Guide for Gay and Lesbian Couples” (www.whethertowed.com). For more information, visit also www.gayestateplanning.com.
- Massachusetts was the first state to legalize same sex marriage in a historic ruling, Goodridge v. Department of Public Health, 440 Mass. 309 (2003), that became effective on May 17, 2004. Other states have followed suit either by way of judicial decision, legislative action or in some instances, a ballot initiative, to legalize same-sex marriage.
- There are a variety of cases on appeal of other states that have declared their local bans on same-sex marriage unconstitutional. It is likely the U.S. Supreme Court will take this issue up again in its next term.
- Rev. Rul. 2013-17, 2013-38 I.R.B. 201.
- Deductions and credits not available to MFS filers include: the child and dependent care credit, the college tuition deduction, the student loan interest deduction, the earned income tax credit, and others.
- These amounts are indexed for inflation and expected to increase in future years.
This amount is also indexed for inflation and expected to increase in future years.
- These states are: Arizona, Colorado, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Missouri, Montana, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Virginia, West Virginia, and Wisconsin. Two other states should also be included, for now: Illinois and Utah. Illinois will come off the list when same-sex marriages begin on June 1, 2014. In Utah, a December 2013 court ruling struck down the state’s same-sex marriage ban, but the case is on appeal as of May 2014.