State of the same-sex union: a tax perspective.

• Author: Scott, Mark
• Position: Tax Law

Over the last year and a half, there has been a whirlwind of activity affecting the legal rights of same-sex married couples. Same-sex couples and their advisors should be aware of the tax ramifications of these developments and the steps that can be taken to realize corresponding tax benefits, some of which are expiring soon.

The U.S. Supreme Court, in United States v. Windsor, 133 S. Ct. 2675 (2013), held that [section]3 of the Defense of Marriage Act (DOMA) was unconstitutional. Section 3 of DOMA, which was enacted in 1996, defined marriage for purposes of all federal laws to mean only "a legal union between one man and one woman as husband and wife," thereby disallowing federal recognition of same-sex marriages. In Windsor, the surviving spouse of a same-sex couple sued for a refund of federal estate taxes paid by the deceased spouse's estate. The couple was married in Toronto, Canada, and resided in New York, which recognized the validity of the marriage. The taxes would not have been payable had the estate qualified for the marital deduction, which was available for bequests to opposite-sex spouses only. By striking down [section]3 of DOMA, the Supreme Court, in effect, held that for purposes of applying federal law, same-sex married couples residing in a jurisdiction that recognizes same-sex marriages (recognition state) were to be treated the same as opposite-sex married couples. However, the Court did not decide the legal fate of same-sex married couples residing in a state, such as Florida, (1) that does not recognize same-sex marriage (nonrecognition state).

The Windsor holding resulted in the extension of over 1,100 federal benefits, including several tax benefits, to same-sex married couples. However, a debate raged over whether federal benefits were available to same-sex married couples residing in nonrecognition states. In Rev. Rul. 2013-17, (2) the U.S. Treasury Department and Internal Revenue Service ended the debate by adopting a "state of celebration" rule; for purposes of all federal tax laws, every same-sex marriage validly performed in a U.S. or foreign jurisdiction would be recognized, even if the spouses are domiciled in a nonrecognition state. The ruling also made clear that such tax treatment does not extend to unmarried individuals (same-sex or different-sex) in a registered domestic partnership, civil union, or other similar relationship recognized under state law.

Income Taxes

* Federal Filing Option--Rev. Rul. 2013-17 set the ground rules for the filing status of same-sex spouses for their federal individual income tax returns. The ruling applies prospectively as of September 16, 2013.

Thus, starting with 2013, and for original 2012 returns filed on or after September 16, 2013, same-sex spouses must file their federal income tax returns as either "married filing jointly" or "married filing separately." Married filing jointly typically is the more advantageous status because of certain limitations on deductions, credits, and exclusions that are imposed on married taxpayers who file separately. Depending on their particular situation, a same-sex couple who changes their status from single to married filing jointly might be subject to an increase in their aggregate federal income taxes (marriage penalty) or enjoy a decrease in their aggregate taxes. An increase in taxes is likely if both spouses have high incomes, and a decrease is likely if one spouse earns most of the couple's income. Therefore, same-sex couples, particularly dual-income couples, may want to consider the income tax ramifications of marriage before walking down the isle.

For prior years, including 2012 returns filed before September 16, 2013, if the same-sex couple was married during the year, they may file an amended return to change their filing status from unmarried to married filing jointly or married filing separately. However, because married filing jointly status may result in a marriage penalty, an analysis of the couple's particular situation is required before deciding to file amended returns. Furthermore, a claim for credit or refund is timely only if made within three years from the date the return was filed or two years from the date the tax was paid, whichever is later.3 Thus, for 2010 returns, the deadline to amend -April 15, 2014, or, if the original filing due date was extended, October 15, 2014--has already passed, but the deadline to amend 2011 and 2012 returns is still open.

* State Filing Issues--What about the recognition of marriage for state income tax purposes? Since the states traditionally defined "marriage," each enacted statutes to regulate tax compliance consistent with its definitions. After Windsor, taxpayers are faced with complex and often confusing state compliance regimes. Though most states have issued guidance on how to file, many other matters have not been addressed. Moreover, there are pending court cases in many jurisdictions that could change the currently promulgated rules.

Couples residing in a state that only recently began recognizing same-sex marriage may question whether they are permitted to file amended state returns to claim a refund. Some states even require same-sex spouses to file amended state returns for years in which the state did not recognize the marriage, if the couple files an amended federal return. (4)

Another area of confusion concerns situations when spouses reside in one jurisdiction but work in another. Imagine the complexity if one spouse works in a state that prohibits a joint filing, such...