Tax Implications of Supreme Court's Same-Sex Marriage Ruling
Marriage equality in all 50 states has implications for state income taxes
On June 26, 2015, the Supreme Court ruled that the 14th Amendment of the US Constitution requires all states in the union to license a marriage between two people and requires all states to recognize marriages lawfully performed in another state or country. Regardless of each person's gender, all people have a right to marry.
"Life becomes easier," says Jason Dinesen, an enrolled agent in Indianola, IA. He's the tax person I go to anytime I have a question about same-sex marriage issues. Dinesen said that tax filings will be easier because there's "no such thing as same-sex marriage anymore." People are either married, or they are not married. From a tax perspective, that's it.
"The biggest benefit is your tax return compliance has been simplified drastically," say, Nanette Lee Miller, CPA, and Janis Cowhey, JD, who are both co-leaders of the Modern Family and LGBT services practice group of Marcum LLP.
Going forward, the original year 2014 tax returns and all future tax returns will be prepared and filed using one of the married filing statuses if the persons are married. The question then becomes what to do about any previously filed returns.
Together, Dinesen and I came up with a list of all the tax things we should be concerned about as a result of the Supreme Court's decision in Obergefell v. Hodges (pdf).
Jason helped me boil it down to just three items:
- Review that prior year state tax returns.
- Change your state income tax withholding to claim married.
- Remember to claim any state refunds from amended returns on next year's federal tax return.
There are non-tax benefits too. Miller and Cowhey point out that:
- Same-sex married couples are now eligible for Social Security benefits based on the spouse's earnings history, in all fifty states.
- They are also eligible to take a leave of absence from work under the federal Family and Medical Leave Act to care for their spouse.
- And they are eligible for veteran's benefits as a surviving spouse.
Any Federal Tax Issues?
There should not be any lingering federal tax issues to take care of, Jason told me. Back in 2013, the IRS announced it recognize the validity of all marriages for federal tax purposes in Revenue Ruling 2013-17 in response to the Supreme Court's decision in United States v. Windsor. So, since that time same-sex married couples have been required to file their 1040s as married persons.
So any issues should be at the state-level.
Reviewing State Tax Returns
In states where same-sex marriage was legally recognized, there should not be any tax changes either. In these states, couples could file both the federal and state returns as married persons. So there should not be any issues here.
In states where same-sex marriage was not recognized, here we have tax changes. In particular, we have an opportunity to amend previously filed state tax returns to change the filing status and recalculate the tax. Filing amended returns will be beneficial if persons would receive additional refunds from the state. Going forward, "if they were married, file as married on their extended 2014 tax returns," says Miller and Cowhey.
A good place to start the review process is with the federal return (which is filed using one of the married filing statuses), and use that to prepare the state return. Next, compare the state tax returns (both the new one, as married, and the two previously filed returns, as unmarried), and analyze the differences. Notice if your overall state tax would be lower if you re-file your state return as married.
"Hold off a little bit," Dinesen cautioned, "to see if there's specific guidance from the state for example streamlined procedures." Miller and Cowhey echo this concern. "It's going to take them a while to implement and process it," they said, referring to the state departments of revenue. "The general thought process is that states will follow what other states have done, but we don't know, and the procedures could be different state by state."
I might recommend the following. We could have the amendments drafted out and ready to go, and then put any finishes touches on them after the state releases their guidance to facilitate efficient processing.
Watch Out for Those Statute of Limitations
Some states follow federal rules; other states have their own rules. The federal rule is that people have three years from the original filing deadline to file an amended return and still get a refund. For example, the year 2012 tax return had an original deadline of April 15, 2013. Add three years, and that's April 15, 2016. So the year 2012 is an "open year" and refunds are still possible if you amend. The year 2011 is tricky. If the person filed on or before April 15, 2012, deadline, then their statute of limitations is already closed, since the three-year mark was April 15, 2015.
However, if the person filed an extension, then 2011 would still be an open year for refunds, but only until October 15, 2015.
That's the federal rule. Check with your state's department of revenue to verify the state-specific statute of limitations on refunds.
Exception to the statute of limitations:
- If you filed a protective claim, you can now file an amended return to seek a refund without regard to the statute of limitations. That is, the protective claim protected you from the expiring statute of limitations.
Watch Out for Any Permanent Differences in Carryovers between Federal and State
In rare circumstances, if you've been filing married federal returns but unmarried state returns, there could conceivably be differences in:
- Basis in nondeductible IRAs,
- Capital losses,
- Basis in property or investments transferred between the spouses, or
- Passive activity loss limitations.
If you are not going to amend, then those different carryover amounts will remain. Make note of any such differences in your permanent file.
Review State-Level Inheritance Tax Issues
Only three states that prohibited same-sex marriage have a state-level inheritance tax. And that would be Kentucky, Nebraska, and Tennessee, which was pointed out to me by Miller and Cowhey. Prospectively, clients who already have an estate plan should "go in and look at your plan," Miller and Cowhey advise.
And, retrospectively, any clients who had a spouse pass away in recent years should review their estate tax returns to see if there is an opportunity to recover overpaid estate tax.
Individuals may want to submit new withholding allowances to adjust their state withholding to married status. But, Dinesen cautioned, sometimes a person needs the higher withholding that comes from the single withholding calculations. So the advice here is to review state-level withholding and adjust accordingly for the expected 2015 state tax liability.
Review W-2 Forms
"Diligently look at their W-2s," Miller and Cowhey advise, "some employers never corrected their W-2s and are still including the spouse's benefits as taxable wages."
That practice of including the same-sex spouse's benefits as taxable wages should have stopped back in 2013 when the IRS issued Revenue Ruling 2013-17. This is an opportunity for the individual to recover overpaid income tax and FICA, and for the employer to recover their share of the overpaid FICA.
The Obergefell case means same-sex married couples have the same tax planning opportunities, and pitfalls, as heterosexual married couples.
For one thing, signing a joint tax return comes with joint and several liabilities. "Once you sign it, you attest that you know everything that's on it," cautions Miller and Cowhey.
For couples who are currently unmarried, it would make sense to review all the tax benefits and drawbacks of getting married. Miller and Cowhey mentioned just some of the areas where choosing to get married can have significant tax impacts: taking losses, the wash sale rule, the adoption credit, and related party transactions. The adoption credit is particularly noteworthy. "You cannot take the credit when you adopt your spouse's child, that's up to thirteen thousand dollars," Miller and Cowhey point out.
But if the same partner adopts the child before they get married, the partner might qualify for the adoption credit.