Tax implications for Massachusetts same-sex marriages.

• Author: Day, Susan

The May 17, 2004 recognition of same sex marriages in Massachusetts created an unprecedented gulf between Federal and state law. In Massachusetts, same-sex spouses are eligible for all benefits available to opposite-sex spouses and also are subject to all requirements applicable to opposite-sex spouses--from income, employment and state taxes, to state inheritance laws; see Technical Information Release (TIR) 04-17 (7/7/04).

Under Federal law, on the other hand, the Defense of Marriage Act prevents same-sex spouses from taking advantage of certain rights granted to married couples, such as filing status, Social Security benefits and the estate tax marital deduction; see Hillary, Goodridge v. Dep't of Pub. Health, 440 Mass. 309 (2003).

This item addresses the Massachusetts tax filing requirements for same sex spouses and reveals the complicated road ahead for such spouses residing in that state and the practitioners preparing their taxes. Although in 2004, these issues apply only to Massachusetts residents, future years will inevitably see additional states recognizing such marriages. Until the Federal government follows the lead of these states, the compliance gymnastics described below will persist.

Effect on Federal and State Income Taxes

Because Federal law does not recognize same-sex marriages, same-sex spouses must continue filing individual Federal returns. Same-sex couples legally married and residing in Massachusetts are required to file either jointly or married filing separately. A proforma Federal joint return may need to be prepared to ease the calculation of those elements of state taxation that depend on Federal law.

For example, adjusted gross income (AGI) must be recalculated for state purposes to reflect AGI as if a Federal joint return bad been filed. The proforum Federal joint AGI will be used to calculate the allowable Massachusetts deductions for medical and dental expenses in excess of 7.5% of AGI, certain miscellaneous deductions that exceed 2% of AGI and student loan interest, which phases out based on modified AGI (MAGI).

Another calculation that follows Federal law is the limit on passive activity losses from actively managed rental real estate. Under Sec. 469(i), the Federal limit for MAGI under $150,000 is $25,000 for both single taxpayers and for married taxpayers filing jointly, and zero for MAGI over $150,000. Under the MAGI cutoff, a same-sex married couple with large real estate losses may deduct up to a...