The Supreme Court’s recent DOMA decision raised a number of questions regarding its tax implications. The IRS answered some of those questions in a Revenue Ruling last week, but a number of issues remain on the state level.
In U.S. v. Windsor, the Court invalidated Section 3 of the Defense of Marriage Act, which defined marriage as a union between one man and one woman as husband and wife, and spouse as a person of the opposite sex who is a husband or a wife.
Last week the IRS issued guidance (Revenue Ruling 2013-17) that answers the question as to what will be the treatment of a legally married same-sex couple that resides in a state that doesn’t recognize same-sex marriages. The ruling says that the IRS will treat as married a couple who were lawfully married in a state that recognizes same-sex marriages, even if the couple resides in a state that does not recognize the marriage.
“The ruling that came out last Thursday said the IRS will treat same-sex married couples as married even if they live in a non-recognition state,” said Marvin Kirsner, a shareholder in the tax department of Greenberg Traurig, LLP. “It’s analogous to a 1958 revenue ruling, which dealt with common-law marriages. The IRS said we recognize a marriage if it was the law of the state where the marriage arose. For federal income tax purposes, if you move to another state that doesn’t recognize common-law marriage, we will still recognize it. That’s one of the bases of the current ruling.”
The marriage must be an actual marriage that is valid in the state in which it took place. “It does not apply to civil unions or registered domestic partnerships,” Kirsner noted.
Moreover, the ruling is retroactive, so that lawfully married same-sex couples may use the ruling to file amended returns and apply for refunds, although they are not required to amend their returns if doing so would result in a greater tax liability. But, since not all couples will save on taxes when they file joint returns, do they have the option to file as single if it would be to their advantage? The answer is no.
“It’s not optional,” Kirsner said. “The IRS says that a same-sex married couple is married whether they want to be or not, even if some will end up owing more in taxes than if they were filing single. The IRS is not giving them the option. They have to file as married filing jointly or married filing separately.”
Of all the states that don’t recognize same-sex marriage, 28 impose a state income tax of some form, and that’s where the unanswered questions arise, according to Kirsner.
“Most state income tax regimes begin with federal taxable income as the starting point,” Kirsner said. "So if a state does not recognize a same-sex marriage, it has to decide how it will handle a validly married same-sex couple that resides and owes tax in the state. If it has them file a joint state return, it will be tacitly recognizing the marriage.”
Another way would be to have each spouse prepare a pro forma federal return as a single person and use the taxable income line on that as a starting point, he indicated.
“The easiest and simplest way would be to simply allow a same-sex couple to file a joint state tax return, recognizing the marriage for tax purposes only,” he said. “But in many cases they will have to amend their current tax laws.”
And tax season is only four months away.