For federal tax purposes, all same-sex couples who are legally married now will be treated the same as opposite-sex married couples, even if they live in one of the 37 states that do not recognize same-sex marriage. This change has huge ramifications for all same-sex couples.
The new rule applies to income taxes as well as estate and gift taxes and takes effect immediately.
New Standard: “State of Celebration”
In the past, the federal government used a “state where the couple resides” standard to determine whether taxpayers are married for federal tax purposes.
In new rules issued in August 2013 (in the wake of the U.S. Supreme Court decision overturning Section 3 of the Defense of Marriage Act), the Internal Revenue Service and the Treasury Department adopted the “state where the couple celebrated its marriage” as the rule.
This means that all same-sex married couples are considered married for federal tax purposes, no matter where they live. Couples can move without affecting their tax status. The rule includes couples married in a U.S. territory or foreign country, but not couples in registered domestic partnerships, civil unions or similar formal relationships under state law (even if state law allows you to file jointly).
Federal Income Taxes
Beginning with the 2013 tax year, same-sex spouses must file federal income tax returns together as “married filing jointly” or individually as “married filing separately.”
The rule is retroactive. A same-sex couple that would have paid less in 2010, 2011 or 2012 under the new rules can file a refund claim (using IRS Form 1040X). A couple that would have paid more under the new rules is under no obligation to make up the difference.
Couples in which one person earns much less than the other or does not work at all will generally pay less federal income tax under the new standard. The couple may be eligible for refunds.
Higher-income couples with similar incomes will be subject to the same “marriage penalty” decried by all other married couples. They are likely to pay more.
Income Taxes on Health Insurance
Same-sex spouses will no longer need to pay income tax on health insurance benefits they received through a spouse. If you paid these extra taxes, you can claim a refund for the past three years.
Estate and Gift Taxes
Same-sex couples can now avoid or defer paying federal estate taxes by transferring money and property to each other without federal estate tax consequences. These taxes are owed only on estates valued at more than $5.25 million (or $10.5 million per couple). State estate taxes will still be owed in states that do not recognize same-sex marriage.
In the past, same-sex couples often used “gifting” to transfer assets between them. Gifting was subject to a $14,000 limit before taxes kicked in. Now, same-sex couples can transfer money and assets tax-free between themselves during their lifetimes. Refunds for the past three years can be claimed.
States in a Muddle
In the 37 states that do not recognize same-sex marriage, couples must file federal tax returns as married but must often file state tax returns as individuals. This causes a problem, since state returns are supposed to mirror federal tax returns.
Each spouse may need to fill out a “dummy” federal return (as if filing as single or head of household) and then transfer the information to the state tax return, which also must be filed as single or head of household. It remains to be seen how the states will address this clumsy process.
Call a Tax Lawyer
The issues surrounding federal taxes and same-sex marriage can be complicated, especially for couples seeking a refund. Plus, the facts in each case and the laws in each state are unique. This article provides a brief, general introduction to the subject. It is not legal advice. For more detailed information about your specific situation, please contact a tax attorney.