Many have fought to seek legal recognition for same-sex couples in our society. A new dawn is upon us with vast federal recognition of our marriages since last summer. On June 26, 2013 the U.S. Supreme Court, in a landmark decision, United States v. Windsor, struck down a portion of the Defense of Marriage Act, essentially ordering the federal government to stop discriminating against lawfully married same-sex couples. One of the many federal agencies that changed its regulations and policies as a result of this decision was the Internal Revenue Service. Now that tax time is upon us, everyone is focused on what this means.
Last August the IRS announced new regulations implementing the Windsor decision. The community breathed a sigh of relief. The IRS stated it would apply the "place of celebration" rule for all federal tax matters. This means that couples lawfully married "where celebrated" (which can include foreign countries) can and will be treated as married for all federal tax purposes, even if they move to or live in a state that does not recognize their marriage.
There are currently 17 states, plus the District of Columbia, that recognize same-sex marriage and 33 that do not, although this could change since there are a variety of lawsuits percolating around the country. Some states that do not recognize the rights of its same-sex citizens to be married, do however, recognize those marriages performed elsewhere. So there is a patchwork of recognition, non-recognition, and quasi-recognition in states today.
Legal and tax practitioners everywhere are still sorting out the details of what this means for same-sex couples. Here is a brief summary of the good, the bad, and the ugly with respect to these new rules:
1. All married couples must file as married couples starting with this year's tax filings for 2013, due by April 15 (unless extended). Marriage is determined based on your legal status on December 31 of the tax year. So, if you were married (lawfully, anywhere) on December 31, 2013, you will be required to file as "married" for your 2013 federal income tax returns. This could be good if you qualify for the marriage "bonus" or bad if the marriage "penalty."
2. Filing married now means you may pay more income taxes (commonly known as the marriage penalty). That's the bad. There is, however, something known as the marriage bonus �" where your combined filings could now reduce your overall tax exposure. This is often the case when one person in the couple has significantly less (or no) income, such as a stay-at-home spouse. The only way to determine where you fall in this spectrum is to run your own tax numbers. Tax professionals can help and a number of software programs, including certain apps, are available to help as well, such as Turbo Tax.
3. Once married and required to file as such, you still may choose to file jointly or separately �" but �" it is almost always better to file jointly. (Couples who elect the "separate" option usually reach the higher marginal rate quicker and have certain itemized deductions phased out quicker.) It is an urban myth that electing "separate" as married puts you back where you were or would have been as single. Separate is not single!
4. Couples who were married in 2012 or earlier may amend prior income tax returns if they would, as a married couple, receive a refund. That's the really good. But, if they would be required to pay more taxes, they are not required to amend. Also good. This may be particularly interesting for couples with very different incomes, such as a stay-at-home spouse and a working spouse. The only way to know whether it is beneficial is to run the numbers.
5. Couples who have moved to a non-recognition state and split up but were not able to become divorced because their new home state won't allow it are still married for federal tax purposes. There are some states that allow out-of-state residents to become divorced if their home state doesn't allow it, such as Delaware, Minnesota, and the District of Columbia. But, the marriage status for tax filings, as mentioned, is determined on December 31 of the tax year. So, unless you were divorced by December 31, 2013, even if you had separated and/or couldn't get divorced, you are still married for federal tax purposes and required to file a married return. That's ugly.
6. If you filed federal estate or gift tax returns in prior years based on transfers to a same-sex spouse, you can now amend those for the past three years. But the clock is ticking. Soon, you will be only able to amend for the past two years.
State income tax filings are an entirely other kettle of fish. The same filing married options apply in recognition states, but non-recognition states are a bit all over the map. You should consult a tax professional in your area to find out the state of the current rules in any non-recognition state.
Whether good, bad, or ugly, the bottom line is we are increasingly being placed on a level playing field with our straight counterparts and not being discriminated against, at least for all federal tax purposes.
Attorney Scott Squillace is the author of a recent book on planning for same-sex couples entitled Whether to Wed: A Legal and Tax Guide for Gay and Lesbian Couples. He runs a boutique estate planning firm in Boston and works with couples nationally. For more information visit: www.gayestateplanning.com or www.whethertowed.com.