Tax & Business Insights

Tax Reporting For Same Sex Couples

Volume 25 Issue 5 --September/October 2013

The United States Supreme Court decision holding certain provisions of the Defense of Marriage Act (DOMA) unconstitutional has created an interesting crazy-quilt of federal and state tax consequences.

Because of DOMA, the IRS and other federal agencies were required to treat same-sex couples, even if legally married under state law, as unmarried for federal law purposes. That is no longer the case.

What does this mean for the taxation of same sex couples?

In the wake of the Supreme Court decision, the IRS has ruled that it will treat as married any same-sex couple that was married in a state that recognizes such marriages, even if they are no longer living in a state that recognizes same-sex marriage.

For example, if a same-sex couple was formally married in a state like New York that authorizes such marriages and then moves to Florida, a state that does not recognize such marriages, the couple is still treated as married for federal tax purposes.

This rule does not apply to domestic partnerships, civil unions and other formal relationships recognized under various state laws. It applies only to legal marriages.

For 2013, such couples must file their federal tax returns as married, either married filing jointly or married filing separately. For earlier years, the couple has the option of filing amended returns for all open years during which they were legally married.

The situation on the state tax side is less clear. The Supreme Court did not strike down provisions of DOMA that permit states to refuse to recognize same-sex marriages recognized in other states. As of a few weeks ago, 14 states and the District of Columbia, along with a few counties in several other states, formally recognize same-sex marriages, while the remaining 37 states do not. Because there are ongoing legal challenges, this count could change any time.

At the time of this writing, some states have issued guidance on the taxation of same-sex couples, and the results are not consistent.

For states like New York that recognize same-sex marriages, the situation is fairly straightforward. Rules similar to the federal filing rules apply, although there may be  different starting dates for recognizing same-sex couples as married.

In the states that do not recognize same-sex marriage and use federal income as the starting point for computing state tax, so far there appear to be at least two different approaches among those states that have addressed the issue.

For example, Oklahoma has announced that even if a same-sex couple files a federal return as married, they must file separate state income tax returns. Apparently this rule requires preparing separate, hypothetical federal returns similar to what would have been filed before the change in federal law and attaching them to the Oklahoma return.

Utah and Louisiana have announced that those states will apparently follow a similar approach.

In North Dakota same-sex couples who file married federal returns must file separate state returns and complete a special schedule to allocate the couple’s income between the spouses.

Wisconsin and Kansas appear to be taking an approach similar to that of North Dakota.

Somewhat mysteriously, the Colorado Department of Revenue said that even though the state does not recognize same-sex marriage, both federal and state returns must have the same filing status, but a few hours later, the Department withdrew that statement.

In some states, such as Idaho, there appear to be ongoing legal disputes concerning the recognition of couples that are legally married in other states.

While most of the states that do not recognize same-sex marriage have yet to issue official guidance, it can probably be expected that most of these states will take one of the two approaches outlined above — filing separate state returns and attaching either hypothetical federal individual  returns or a special state schedule to allocate income. No doubt this issue will continue to evolve.

For federal returns and returns in states where married filing is permitted, there are tax planning opportunities with respect to earlier tax years.  While filing federal returns with married status is required for 2013, in many cases it may be possible and desirable to file  amended returns to claim married status for earlier years that are still open for refund purposes.

If you have questions about tax reporting for same sex couples please call the Tax & Business Professionals.

«The information in this article is current as of the end of October, 2013.»

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