Government guidance changes tax, benefit situation for many
Married same-sex couples gained greater clarity on financial planning issues with guidance issued by the U.S. Department of Treasury and the Internal Revenue Service (IRS) in August 2013, and the Department of Labor (DOL) in September 2013. The government-issued guidance stated that same-sex couples who were legally married in jurisdictions that recognize same-sex marriages will be treated as married couples for federal tax purposes, regardless of whether the couple lives in a state that recognizes same-sex marriage or not.1
With the rulings, married gay and lesbian couples can now file joint federal tax returns, and may be able to file amended returns for past years. The federal tax rulings do not apply to couples who have entered into civil unions or registered domestic partnerships under state law.
The Treasury and IRS ruling adopts a “state of celebration” stance (and the DOL is also following that view), which means that the state where the marriage took place determines its legal standing. If the couple got married following the laws in a state that recognizes same-sex marriage, the marriage is legal and recognized for federal tax purposes. Thirteen states (CA, CT, DE, IA, ME, MD, MA, MN, NH, NY, RI, VT, and WA) and the District of Columbia currently allow same-sex marriage.2
In September 2013, the Department of Labor (DOL) ruled that same-sex couples can participate in employee benefit plans, even if the state where they live does not recognize gay marriage. The tax and DOL rulings are just two of such explanations that have been issued by various federal agencies and departments that are interpreting the impact of the June 26, 2013, Supreme Court decision overturning part of the Defense of Marriage Act (DOMA) that limited the definition of marriage to opposite-sex couples for the purposes of all federal matters. For more information on the DOMA ruling, see TIAA-CREF’s summary of the Supreme Court’s DOMA decision and its impact on same-sex couple’s finances.
As various agencies continue to clarify how the decision affects areas such as taxes, health insurance, retirement plans, employee benefits, Social Security, and other areas, we anticipate that more guidance will be issued. More immediately, the IRS guidance has some important tax and benefit information for married same-sex couples, especially for the 2013 tax season.
Married same-sex couples are now treated equally when it comes to taking personal and dependency exemptions as well as the standard deduction, contributing to an Individual Retirement Account, and claiming the earned income tax credit or child tax credit. In addition, couples now benefit from equal treatment when it comes to employer-paid health insurance. After September 16, health insurance purchased for a same-sex spouse can be done so on a pre-tax basis, which lowers the couple’s taxable income. Previously, couples had to purchase such coverage on an after-tax basis.
These are significant changes and will affect the tax situations of every legally married same-sex couple, whether they’re filing jointly or not. As a result, it’s important to discuss the tax implications with an accountant or tax advisor to determine the best course of action for each situation. Advisors can help couples determine if end-of-year tax-planning strategies such as making charitable contributions or increasing contributions to employer-sponsored retirement plans could reduce tax liability.
Note that the ruling could have a significant effect on the tax liability for some same-sex couples. When both spouses earn relatively equal high-income levels, they may face the so-called “marriage penalty,” in which their combined tax bill is higher than if they filed separately. However, couples can also jointly itemize their deductions, if appropriate, which could offset the tax owed. Consult with your tax professional to see if itemizing deductions or taking other steps can offset the tax owed.
Couples who enjoy tax advantages from choosing to be treated as married on their IRS filings and have a few years of marriage under their belt have more good news: They can file amended returns within the statute of limitations, which is typically three years from the date the return is filed or two years from the date the tax was paid, whichever is later.
Refund claims can be filed for tax years 2010, 2011, and 2012, provided the couple was married for all or part of that year. If marital status increases the couple’s tax liability, they are not required to file an amended return. To file a claim for a refund, use IRS Form 1040X, Amended U.S. Individual Income Tax Return. The IRS offers more guidance on amending tax returns, but couples should get sound tax advice before amending their returns to determine if they are, in fact, owed a refund.
Prior to the recent tax ruling, married same-sex couples living in a state that does not recognize their marriage were subject to federal tax on employer benefits provided for their spouse, and costs were typically payable on an after-tax basis. The recent ruling now allows employers to recognize such same-sex couples’ marriages so these benefits can be payable on a pre-tax basis. As legally recognized same-sex marriages are now respected nationally for federal tax purposes, this is an important time to review with a human resources benefit manager what options may be available, and how the taxation of benefits is changing.
The recent rulings and the pronouncements from the Treasury Department, the IRS and the DOL will also affect how married same-sex couples may approach their retirement planning and the beneficiary designations associated with their retirement accounts. The required minimum distribution rules applicable to IRAs and qualified retirement plans allow specific treatment when these accounts are payable to a surviving spouse after the account holder’s death. Same-sex married couples should review beneficiary designations, and how those matters are coordinated with their broader estate planning.
Legally married same-sex couples now enjoy the same federal gift or estate tax benefits as heterosexual married couples. Primarily, those benefits include an unlimited gift or estate tax marital deduction for any amounts passing to a spouse, either as an outright gift or in a trust that qualifies for the unlimited marital deduction. For all individuals, the current threshold for when gift or estate tax may apply begins at cumulative taxable transfers above $5.25 million in 2013.
For same-sex married couples, the IRS ruling now allows them the ability to pass amounts in excess of stated thresholds to a spouse fully, subject to the unlimited gift or estate tax marital deduction. Furthermore, the concept of “portability” provides that if a deceased spouse has not fully used his or her estate tax exclusion amount to shelter taxable transfers at death, any unused amount can roll-over (“port”) to the surviving spouse. For same-sex married couples, this concept of portability also now applies. For those couples, the recent ruling creating equal federal tax treatment for their marriage marks a good opportunity to revisit with their financial and tax advisors the current state of their estate plans. This may be a good time to update such documents to ensure these benefits are being fully used.
Just as taxpayers can now file refund claims for personal incomes taxes, they can also file refund claims for gift or estate taxes within the same statute of limitations. A legally married same-sex surviving spouse who paid gift or estate taxes on transfers that would now be protected by the unlimited gift or estate tax marital deduction can claim a refund within the statute of limitations. Those who wish to file such claims should use IRS Form 843, Claim for Refund and Request for Abatement. For more on estate and gift taxes, including thresholds for previous years, the IRS offers additional guidance.
The IRS, Treasury Department and the DOL, as well as other federal departments and agencies, will continue to issue guidance related to the DOMA ruling. As equal treatment for same-sex couples on federal tax and retirement issues continues to evolve, it’s a good time to ensure you are working with a financial advisor, accountant and tax lawyer familiar with this developing landscape.
1 “All Legal Same-Sex Marriage Will Be Recognized for Federal Tax Purposes,” U.S. Department of Treasury. August 29, 2013 http://www.treasury.gov/press-center/press-releases/Pages/jl2153.aspx
See also U.S. Department of Labor Technical Release 2013-04, September 18, 2013.
2 FreedomtoMarry.org, June 26, 2013, http://www.freedomtomarry.org/states/
This article is for general informational purposes only. It is not intended to be used, and cannot be used, as a substitute for specific individualized legal or tax advice. Additionally, any tax information provided is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor, CPA and/or attorney for specific advice based on the individual’s personal circumstances. Examples included in this article, if any, are hypothetical and for illustrative purposes only.
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