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Same-sex marriage and taxes: Gay couples could face surprises at tax time

Tuesday, January 21, 2014
Edith Windsor

Richard Drew, AP
Edith Windsor at the offices of the New York Civil Liberties Union, in New York. When it comes to things like estate taxes, the federal recognition of same-sex marriage will help legally married gay and lesbian couples. That was the issue in the Supreme Court decision in the case of Windsor, who had to pay estate taxes after her lesbian spouse died.

WASHINGTON — 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.

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25 more reader comments:

  1. Are you fucking kidding me??? Gays fought for the right to get into a LEGALLY binding contract with the State and now they’re complaining about TAXES??? WTF?!!! Edith Windsor is worth around TEN MILLION DOLLARS. BOOHOO!!!

    Posted on Tuesday, January 21, 2014 at 6:39pm
  2. "Marriage penalty"....

    Replied on Tuesday, January 21, 2014 at 6:41pm
  3. I don't see anybody complaining. The article is just letting us know what to expect. Take a chill pill and release the caps lock, Benji.

    Replied on Tuesday, January 21, 2014 at 6:54pm
  4. isn’t it like this for all couples who are married? Why is it being a “big deal” and a surprise?

    Posted on Tuesday, January 21, 2014 at 6:44pm
  5. Uh, no! Straight married couples can file married on both Federal and state returns. Gay married couples can only file on both if they live in a state that recognizes their marriage. Here in Arizona we will have to file as Single on the state income tax return. We are still NOT equal.

    Replied on Tuesday, January 21, 2014 at 10:50pm
  6. Is this good news or bed news for same sex couples ?

    Posted on Tuesday, January 21, 2014 at 6:45pm
  7. Guess we need to pump out a few kids

    Posted on Tuesday, January 21, 2014 at 6:46pm
  8. I love how Utah is allowing people to file marriage taxes even though they will not give them other state marriage rights… greedy bastards.

    Posted on Tuesday, January 21, 2014 at 6:46pm
  9. It’s the same thing for straight couples, with the exception of possibly having to file as single on State taxes if the state doesn’t recognize gay marriage.

    Posted on Tuesday, January 21, 2014 at 6:50pm
  10. I don’t think anyone is complaining about the taxes that I’ve seen. Just like the article says: “Filing federal taxes could become more complicated for gay married couples who live in states that don’t recognize their marriage.” That’s the complaint people have with it. Some benefit from this, some have to work on their taxes a little harder this year. Just read the entire article.

    Posted on Tuesday, January 21, 2014 at 6:53pm
  11. Then go to H&R Block.

    Replied on Tuesday, January 21, 2014 at 6:55pm
  12. I'm sure many people will be turning to such companies.

    Replied on Tuesday, January 21, 2014 at 6:57pm
  13. SO MUCH OPPRESSION

    Replied on Tuesday, January 21, 2014 at 7:03pm
  14. I think the “surprise” has more to do with needing to prepare a dummy federal return filing single in order to correctly figure a state return where a marriage is not legally recognized. Luckily for us in Texas, we don’t have state income tax so we don’t have to mess with it. Small favors and all that…

    Posted on Tuesday, January 21, 2014 at 6:55pm
  15. I am definitely not complaining. When I got married, I got married with the hope that we would be treated the exact same as everybody else. I certainly do not want any special treatment. If I end up having to pay in, I will do it with pride and a smile on my face, just for being treated as an equal.

    Posted on Tuesday, January 21, 2014 at 7:03pm
  16. We faced our surprise for sure. But we’re staying married.

    Posted on Tuesday, January 21, 2014 at 7:10pm
  17. I’m glad I’m a Texas resident. No state taxes.

    Posted on Tuesday, January 21, 2014 at 7:21pm
  18. Ah yes, the marriage penalty. The one tax rule that is still stuck in the 1950s, designed to allow a married couple where only one works to get a break on their taxes.
    What we need to do is eliminate the filing separate and let any married person and their spouse to file as an individual.
    Even better, two filing statuses:
    Head of Household—all income by all members of the household are included on this joint return.
    Single—each member of a household files separately, in a two, or more, earner household, at least one earner must file schedule A. Both can file schedule A (cannot duplicate any deductions) or one can take the standard deduction and the other must file schedule A.

    Posted on Tuesday, January 21, 2014 at 7:44pm
  19. Getting married did not help me at tax time but it wouldn’t have mattered if it was same or opposite sex marriage and that isn’t why I got married in the first place. The benefits if being married to my fantastic wife so out way any financial considerations!!

    Posted on Tuesday, January 21, 2014 at 8:27pm
  20. Sorry Benji Moque-Comique who’s complaining? Or is that just what you want to happen so that you can troll about it?

    Posted on Tuesday, January 21, 2014 at 9:45pm
  21. We won’t be surprised…thanks to getting info like this.

    The “marriage penalty” is certainly annoying to affected couples, but is just a side effect of progressive income tax rates and itemized vs standard deductions.

    The benefits of marriage (both emotional and financial) greatly outweigh annoyances with the tax formulas. Of course we still have the right to complain on April 15. :)

    Posted on Tuesday, January 21, 2014 at 9:47pm
  22. interesting article…

    Posted on Tuesday, January 21, 2014 at 10:34pm
  23. It wouldn’t be so damn complicated if all of the states had equal rights. Then every married couple would file the same for Federal and State. How hard can this be?

    Posted on Tuesday, January 21, 2014 at 10:42pm
  24. So glad I live in a state that recognizes my marriage.

    Posted on Tuesday, January 21, 2014 at 10:42pm
  25. Same in Georgia Paul.

    Posted on Tuesday, January 21, 2014 at 11:54pm