Gay Marriage and Taxes: Marriage Penalty Possible
Legally married same-sex couples may be in for a couple of surprises come tax time.
Filing federal taxes could become more complicated for gay married couples who live in states that don’t recognize their marriage.
When the U.S. Supreme Court threw out provisions of the Defense of Marriage Act, which had defined marriage as a "legal union between one man and one woman," it set the stage for equal treatment of married couples under federal law, regardless of the makeup of the marriage.
And that applies to federal taxes, even if the couple is living in a state that does not recognize gay marriage, the Treasury Department and Internal Revenue Service ruled.
"This ruling assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change," Treasury Secretary Jacob Lew said last summer when the ruling was issued to take into account the Supreme Court’s decision.
Seventeen states and the District of Columbia legally recognize same-sex marriage. Last month, a federal judge overturned Utah’s ban on gay marriage, and just last week a federal judge struck down Oklahoma’s ban.
"Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes," the IRS said. "The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit."
However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
Usually, legally married same-sex couples now will be required to choose the filing status married filing jointly or married filing separately on their federal tax returns. If children are involved and the couple lives separately, head of household might be chosen by the spouse providing more than half the support for the child, similar to opposite sex couples.
"Hopefully they understand that they don’t have a choice now," said Craig Richards, director of tax services at Fiduciary Trust. "That’s going to change their picture."
For same-sex married couples, like all married couples, the marriage penalty could kick in.
It’s especially true if both spouses work, said Barbara Weltman, a contributing editor to "J.K Lasser’s Your Income Tax 2014."
That’s because filers with higher incomes are now subject to new taxes to fund the health care reform law and a phaseout of personal exemptions and deductions. And if each partner in a same-sex marriage is working, the couple could find themselves over the threshold. They also could find it more difficult to deduct medical expenses based on their joint income. For most taxpayers, beginning with the 2013 tax year, medical expenses have to exceed 10 percent of adjusted gross income to be deductible.
Education credits and deductions also phase out at higher incomes.
However, if only one spouse works, there could be a bonus, Weltman said. The same applies if one spouse has a higher income than the other.
That’s not the only possible tax advantage for same-sex couples.
If one member of a same-sex married couple paid for health insurance for the spouse through an employer-sponsored plan, for example, the cost of that health insurance can be paid for pre-tax and excluded from income, according to the IRS.
Estates of legally married same-sex couples will be treated the same as opposite-sex couples - they can pass on their estates to their surviving spouse without it being taxed. This was the basis of the Supreme Court gay marriage decision in the case of Edith Windsor, who challenged a $363,000 estate tax bill after her legal same-sex spouse died in 2009.
The Supreme Court decision, as it applies to taxes, "made life simpler for some of those people and more complicated for some others," said Mark Luscombe, the principal federal tax analyst for CCH.
Same-sex couples who live in states that recognize their marriage can do joint returns for both federal and state taxes.
But in states that don’t recognize same-sex marriage, they’re likely to have to file as single on the state returns.
There’s at least one exception. Missouri does not recognize gay marriage, but Gov. Jay Nixon says same-sex couples who legally married elsewhere but live in Missouri can file joint state tax returns.
"This is not about the definition of marriage," Nixon said when announcing his executive order in November. "This is about the structure of our tax code."
In other states that don’t recognize same-sex marriage, though, it might mean preparing two separate versions of the federal return - one for filing the federal return and one to get the numbers needed to prepare and file the state return. This is because many states use the federal return as the starting point for the state returns.
People in legal same-sex marriages also have the option of filing amended returns for the 2010, 2011 and 2012 tax years.
"There could be a lot of people who wouldn’t want to because the joint tax will be higher," said Luscombe, the principal federal tax analyst for CCH.
Greg Rosica, a contributing author to Ernst & Young’s "EY Tax Guide 2014," said people should review their individual circumstances carefully before filing an amended return.