Gay Spouses in All States Now Married Under U.S. Tax Law

August 30, 2013 — Leave a comment

“There are going to be a lot of state tax attorneys working overtime next week,” said Verenda Smith, deputy director at the Federation of Tax Administrators. “This is what everyone has been waiting for. Now states can release their own guidance.”

Even if the local authorities don’t recognize gay marriages, the IRS will treat gay spouses as married under federal tax law. The Treasury Department made a statement today reinforcing the U.S. Supreme Court’s strike-down of the Defense of Marriage Act (DOMA). The Act forbade the IRS from letting married homosexual couples file joint tax returns. All married couples will qualify, even if they have moved.

“More than 200 provisions in the tax code and federal regulations reference marriage, affecting a range of financial matters such as retirement accounts and health benefits, according to the IRS. Couples with unequal incomes will benefit from the marriage bonuses in the tax code, while those with relatively equal incomes will have to pay more. The ruling also will make it easier for spouses to inherit money tax-free.”

According to 2010 Census estimates, there are 130,000 married same-sex couples in the country. For the 2013 year, these couples must file using either the married filing jointly or married filing separately status. Additionally, the couples can now amend refunds from the last three years. On the plus side, they aren’t required to refile returns if they have to would pay more.

“For example, before the court’s ruling, same-sex spouses who received benefits from one of their employers had to consider the benefits’ value as taxable income for the spouse who doesn’t work for that employer. On an amended return, they could remove that from income and recalculate their tax liability.” Once again, all will have the opportunity to amend their tax returns from 2010-12, but only if they choose.

Not all same-sex couples will benefit from the decision; some may pay higher income taxes as a result of the “marriage penalty.”

Taxpayers who haven’t filed their 2012 taxes can choose to file as two single people or a married couple before Sept. 16. After that, they must file as married, the IRS said.

Lastly, the Treasury Department’s statement doesn’t apply to recognized civil unions or domestic partnerships that aren’t marriages. The same is true for Social Security, which will only recognize couples living in states that allow same-sex marriages.

In all, here is a summary of some of the tax breaks newly available to legally married same-sex couples:

  • The right to file a joint return, which can produce a lower joint tax than the total tax paid by the same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners);
  • The opportunity to get tax-free employer health coverage for the same-sex spouse;
  • The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;
  • The opportunity for the estate of the first spouse to die to get a marital deduction for amounts transferred to the surviving spouse;
  • The opportunity for the estate of the first spouse to die to transfer the deceased spouse’s unused exclusion amount to the surviving spouse;
  • The opportunity to consent to make “split” gifts (i.e., gifts to others treated as if made one-half by each); and
  • The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for non-spousal beneficiaries.

Same sex couples who filed tax returns under DOMA should consider filing amended returns with claims for refund, where applicable. As seen in the Windsor case, these newfound tax breaks can yield big savings.

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