Friday, 22 November 2013 00:00

Federal Tax Law and Same-Sex Marriage

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This past summer, the Internal Revenue Service and the Treasury Department announced that couples married in jurisdictions that legally recognize same-sex unions will, commencing with the 2013 tax year, be classified as “married” for Federal tax purposes. This policy change not only affects those couples residing in states where same-sex marriage is legal, but extends to couples who were married in a supporting jurisdiction but physically reside in a jurisdiction that does not support same-sex unions. Currently, 14 states support legal same-sex marriages: Massachusetts, California, Connecticut, Iowa, New Jersey, Delaware, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Maine, Maryland and Washington comprise the complete list. As we approach the end of the 2013 tax year, we thought it might be helpful to recap the changes, and talk a little bit about what to expect next year if you’re filing for the first time as a same-sex couple.

Taken at face value, the changes are pretty straightforward: as part of the new ruling, same-sex couples will be classified as “married” by the IRS, meaning that same-sex unions will be treated the same as “traditional” marriages from a Federal tax classification standpoint. This includes income taxes, gift taxes, and estate taxes, and also encompasses all areas of IRS tax law where marriage classification is a factor. Personal exemptions, dependency exemptions, filing status, standard deductions, IRA contributions, child and earned income tax credits, and deductions based on employee benefits are all driven by marriage classification when filing Federal taxes. Under the new ruling, legally-married same-sex couples are now able to file using either the “married filing jointly” or “married filing separately” status available formerly only to those partners in “traditional” unions.

As with seemingly everything related to the IRS, however, there are some wrinkles. First, the ruling applies only to legally-binding same-sex marriages, regardless of domicile. Domestic partnerships, civil unions, and other common-law relationships do not qualify. Secondly, and perhaps most importantly, the new ruling requires that partners in a same-sex union must change their Federal tax status from “single” to “married.” With this change in status comes the very real possibility that marginal tax rates may change unfavorably, and eligibility for certain exemptions and the classification of certain types of employee benefits might be compromised. Given that no one likes to be surprised at the last minute when the IRS is involved, we advocate getting ahead of the status change early, and understanding how it will affect your tax bracket and eligibility going forward. While fairly uncomplicated scenarios may not require the services of a tax preparation specialist, we strongly advise seeking advice from a qualified tax attorney or CPA if you suspect (or discover) that your change of status may have unanticipated downside. If you’ve got a significant estate, or are in a situation where changes to gift-tax status brought about by the new classification might come into play, it’s probably best that you consult a professional who can help you understand the nuances.

Finally, several of the states listed above legalized same-sex unions a number of years ago; as a result of the statute of limitations incorporated as part of the new ruling, partners in same-sex marriages can choose to file amended returns for tax years 2010, 2011, and 2012 if they so choose (and if the obvious benefit of doing so exists!).

For more information about tax and estate planning for the same-sex IRS classification change, including referrals to qualified CPAs and tax attorneys, we invite you to contact us to schedule a free and confidential consultation.

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