Question: We have heard that the Internal Revenue Service (IRS) will now recognize Same-Sex Marriages for all Federal Tax Purposes. Would you please tell us more about this?
Answer: Since the Supreme Court struck down Section 3 of the federal Defense of Marriage Act in June, federal agencies have begun updating regulations to conform to the decision. On August 29, the IRS and the Treasury Department issued Revenue Ruling 2013-17. This is a joint ruling stating that same-sex couples legally married in any jurisdiction that recognizes the marriage will be treated as legally married for all federal tax purposes. This is true even if the state where they live does not recognize the marriage. The ruling will not apply to couples in civil unions or domestic partnerships.
There are many federal tax provisions involving marital status, all of which will be affected by this new ruling. These provisions include:
- Filing status;
- Claiming personal exemptions;
- Dependency exemptions;
- Taking the standard deduction;
- Employee benefits;
- Contributing to an IRA; and
- Claiming the earned income tax credit or child tax credit.
The ruling will also affect estate and gift taxes. This means that married same-sex couples can take advantage of the marital deduction, portability, and gift-splitting.
The marital deduction allows spouses to transfer as much as they want to each other, during life or at death, without having to pay any federal estate or gift tax, as long as the recipient spouse is a U.S. Citizen. Portability is the ability of widows and widowers to add the unused estate tax exclusion of the spouse who died most recently to their own. Gift splitting allows spouses to combine the annual exclusion (currently $14,000) from the gift tax and give either $14,000 each, $28,000 from a joint account, or $28,000 from one of their individual accounts.
Same-Sex Marriages for Federal Tax Purposes
Married same-sex couples will now be able to enjoy federal tax benefits previously unavailable to them, but they may also face marriage penalties. Marriage penalties result from the combination of progressive tax rates, which impose higher rates on higher incomes. Combining incomes can result in some income being taxed at higher rates than if spouses’ incomes were taxed separately. This is more likely to occur if both spouses have similar incomes.
Couples in which one spouse earns most or all of the income are more likely to receive a marriage tax savings. This is because joint filing shifts the higher earning spouse’s income into a lower tax bracket. Couples who would have been eligible for a refund can file amended returns for prior tax years up until the statute of limitations has run. The statute of limitations is generally three years from the date the return was filed or two years from the date the tax is paid, whichever is later. Couples are not required to file amended returns. Due to this fact, couples will not owe tax for prior years where they filed single as federal law at that time required.
In addition, the new ruling may create additional work for married same-sex couples living in one of the 37 states that do not currently recognize same-sex marriage. Previously, these couples would have filed both federal and state tax returns as individuals. Now legally married couples will have to file federal returns as a married couple but will likely be required to continue filing their state tax returns as single individuals.
Same-sex couples should consult with their advisors to determine how these new rules will impact them.
Henry C. Weatherby, Esq., CLU, ChFC, CEBS
Weatherby & Associates, PC
Bloomfield, Connecticut 06002