Rather than cheering or jeering the Supreme Court’s recent opinion in United States v. Windsor, I thought I’d talk about what everyone really wants to know: what will happen to same sex marriage and taxes now that Section 3 of the Defense of Marriage Act (DOMA) has been struck down struck down?
Until the IRS is able to condescend to our level and release The Official Word, we won’t know everything for sure. So what follows is an educated guess by people who spend all kinds of time looking into this stuff (i.e. my higher ups in Washington).
Same sex marriage federal taxes will now join in MFI (Married Filing Jointly) crowd on their 1040s. That’s mostly a good thing in terms of total tax liability. Though not always, as I’ve discussed in a previous post. That “single” box that you used to check is no longer an option. If you want to file a separate return from your spouse, you’ll be banished to the world of “Married Filing Separately,” a place designed to benefit nobody.
The biggest question on the Tax World’s mind is what happens to a same-sex marriage taxes for a couple that marries in DC then moves to Texas (or any other state doesn’t allow gay marriage). No one knows for sure. Previously, the IRS decreed in Rev. Rul. 58-66 that a common law marriage established in one state would continue to be respected for Federal purposes even if they moved to a state that didn’t recognize the marriage. So there’s some precedence to allow a couple to continue with their MFJ once established, no matter which state they move to.
What will be interesting to see is how the states handle the DOMA change for their income tax forms. Many states are written to follow the Federal ‘check the box’ marital status. Any state that continues to disallow gay marriage would have to change their laws, requiring a split from the Federal 1040. That’ll be a pain to deal with, forcing a recalculation of taxable income from MFJ to Single, depending on which state they’re filing in. It could turn into quite a headache for a couple with filings in multiple states (or, in other words, bad news for taxpayers, good news for tax accountants).
Another big question for same sex marriage taxes if the couple can go back and amend their old returns to file them MFJ. Since the court decision stated that DOMA was never valid, there’s certainly an argument to “yes,” at least for the years that are still open under the statute of limitations (3 years).
We’re also still unsure what to do if a person marked Single at extension time for their 2012 return. Will the couple be able to move to MFJ for the final return? It seems likely, but it’s not yet known.
And what about the eight states that allow civil unions? Will those be considered marriages for federal tax purposes? Good question. And we do not have an answer to that yet.
Moving away from income taxes is employment taxes. Married couples can claim reduce their FICA (federal payroll tax) liability for the insurance premiums paid for their spouse. That benefit will now extend to same sex marriages as well. If any taxes were paid during the open years (that statute of limitations thing again) without reducing for spousal insurance, the employer and employee can file a refund claim and send out an amended W-2 for those open years. It could be a descent chunk of change.
Gift and estate taxes will also be affected, which were actually the central dispute of the claim. It was a travesty that the gift tax wasn’t ruled unconstitutional this round, but I digress. Gifts to non-spouses are limited to $13,000 per year (indexed for inflation) before you start getting hit by the tax man. Gifts to spouses, however, are tax free. So now same sex married couples can give all the money and gifts they want to their spouse without being hit with federal taxes. Which anyone should be able to do, married or not. Just sayin’.
So there’s still a lot we don’t know, which is typical of tax. Consult your tax professional before you make any tax filing decisions, and hopefully by then we’ll know a little more. And, as always, be weary of anything you read on the internet that’s not The Good Word found on the IRS’s website. Even if it’s posted under the picture of an adorable cat.
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Disclaimer: If you didn’t get it from the last paragraph, this is not tax advice. If you want tax advice, pay a CPA who is willing to sign their name in blood (blood optional) on page two of your ten forty.