The IRS recently issued much-anticipated guidance on same-sex marriages and federal taxes following the Supreme Court’s June 26, 2013 decision in E.S. Windsor to strike down Section 3 of the Defense of Marriage Act (DOMA). All legally married same-sex couples will be treated as married for federal tax purposes regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage. The IRS guidance answers many questions and also opens many tax planning opportunities previously unavailable to married same-sex couples.
After the Supreme Court’s decision in Windsor, the IRS effectively had two choices: it could take a place of domicile approach or a place of celebration approach to same-sex marriage. The IRS chose a place of celebration approach. This means, in a nutshell, that the IRS is recognizing same-sex marriages nationwide regardless of where the same-sex couple resides. However, the IRS ruling does not apply to domestic partners, civil unions and other formal relationships recognized under state law.
Filing Original and Amended Returns
For many married same-sex couples, the first question that comes to mind is when can they file their federal income tax returns as married filing jointly (or married filing separately). Legally married same-sex couples generally must file their 2013 returns (and all subsequent years) using married filing jointly or married filing separately filing status.
For prior years, the rules are more complicated. For 2012 and all prior years, same-sex spouses who file an original tax return on or after September 16, 2013 generally must file using a married filing separately or jointly filing status. Same-sex spouses who have already filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status if the statute of limitations has not expired. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.
Keep in mind that the benefits of filing a joint return may not always be greater than filing separately as unmarried individuals. This is known as the marriage penalty and is a factor for many opposite-sex married couples and same-sex married couples. Our office can review your returns and evaluate if filing jointly or filing separately would maximize your tax savings.
Health Insurance and Benefits
Because of Section 3 of DOMA, employers that allowed an employee to add his or her same-sex spouse to their health plan needed to impute income to the employee for federal income tax purposes equal to the fair market value of health coverage provided to the same-sex spouse. DOMA also precluded same-sex couples from enjoying the same benefits of cafeteria plans, including flexible heath spending accounts, health savings accounts and health reimbursement arrangements available to opposite-sex married couples. In its guidance, the IRS explained that if an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee may file an amended return (for open tax years) reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse.
The IRS also explained that employers may claim a refund for Social Security and Medicare taxes paid on the benefits if the period for filing a refund claim is open. The IRS intends to issue more guidance for employers. However, claims for refunds of overwithheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years on an amended return if the limitations period is open.
Patchwork of Laws
The Supreme Court did not strike down Section 2 of DOMA, which permits states to refuse to recognize same-sex marriages recognized in other states. The result is a patchwork of laws on same-sex marriage across the U.S. The following states currently recognize same-sex marriage: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington. The District of Columbia also recognizes same-sex marriage.
If you have any questions about the IRS guidance for same-sex couples, please contact our office. The IRS is expected to issue more guidance for individuals as the 2014 filing season approaches and for employers’ health insurance benefits. Our office will keep you posted on developments.