Married same-sex couples are awaiting a decision by the Supreme Court to help them resolve their tax-filing challenges on tax day.
The Supreme Court listened to arguments last month on the constitutionality of the Defense of Marriage Act and of California’s Proposition 8 (see Supreme Court to Hear DOMA Case with Tax Implications). A decision is expected by June.
Best-selling financial author and CNBC host Suze Orman discussed the issue, along with a pair of Ernst & Young partners, during a press conference Tuesday sponsored by the Respect for Marriage Coalition, a partnership of more than 100 civil rights, faith, health, labor, business, legal, LGBT, student and women's organizations that are working together to end the Defense of Marriage Act and increase support for the freedom to marry.
They noted that a patchwork set of often contradictory laws across states, counties and cities on same-sex marriage—along with DOMA—leaves many couples facing different protocols, paperwork and additional financial costs. Because of DOMA, married same-sex couples and their families are not federally eligible for—and their spouses are not entitled to—the same economic benefits and protections available to married opposite-sex spouses. In addition, DOMA presents challenges for businesses that offer competitive benefits to all employees. These benefits for married same-sex families are treated as taxable income, which the Respect for Marriage Coalition estimates costs these taxpayers millions of dollars annually.
“All throughout the United States today, people are freaking out because they have to pay their taxes,” said Orman. “Can you imagine that if you were gay and you were married, not only would you have to be filing taxes as a joint couple on the state level if you happen to be in one of the states that recognizes it, but you would also then have to be filing federal returns that are on a single level, because you can’t file jointly for federal? So you have about 1,100 variations as to why gay couples, especially married couples, are discriminated against within the tax-paying system. Can you also imagine that on your tax return today, if you had a partner and the partner was not covered by their own insurance where they work—or maybe they’re a stay-at-home parent—that to provide them with health insurance, you or they would have to pay taxes on that benefit. That costs a gay couple anywhere from $1,000 to $7,000 more per year in taxes, depending on the benefits.”
Orman noted that the discrimination extends to retirement benefits as well as taxes. “Maybe you have a stay-at-home partner or spouse, and they do not work because they’re staying at home to take care of the children,” she said. “But yet, because you’re not recognized on a federal level, you can’t open a Roth IRA or a traditional IRA because they don’t have any earned income. All the advantages that heterosexual married people get to enjoy—such as doing an IRA rollover upon the death of one of the spouses rather than having to take a distribution—that is not something a gay couple gets to do.”
Orman noted that she and her wife Kathy Travis would experience similar discrimination if one of them were to die before the other. “You don’t get to take half of your Social Security benefits from your spouse, and if your spouse happens to die, you don’t get their Social Security, like you do if you were heterosexual,” Orman added. “There is such discrimination, from insurance benefits to Social Security benefits to tax benefits, to anything you can possibly think of. It is a travesty, to say the least, for many people that are in my situation. It is absolutely ridiculous that upon my death, KT is going to have to pay estate tax on the majority of my estate, and I’m going to have to pay estate tax on the majority of her estate. If we were married and recognized on a federal level, we would not owe one penny. That law alone will cost many, many gay people millions and millions of dollars unnecessarily. So the overturn of DOMA and the recognition of marriage in every state are essential for us to have true equality. The social and civil discrimination that goes on when it comes to gay marriage is absolutely inexcusable, but the financial discrimination just really adds injury to insult.”
Elda Di Re, a tax leader and partner in the personal financial services practice at Ernst & Young, agreed that there are a number of filing complexities and inequities in the Tax Code for those who are not recognized as married couples.
“Even if that couple is married under state law and can file as a married couple in that state, they are still required to be unmarried for federal income tax purposes,” she noted. “This requires them to compute their taxes under two different methodologies. Most states piggyback on the federal regulations, so they have to do their federal returns twice, once as potentially married filing jointly or married filing separately [on state returns], and then for federal [returns] as two separate individuals. That means either spending the time to prepare or having someone else prepare their returns two different ways. Along with that calculation is the calculation of the income and the deductions flowing into those either separate or joint returns. That forces the couple to look at what is the ownership of the property, where was the cash earned and where was it spent? For example, one takes a deduction for mortgage interest or real estate taxes, number one, if that person paid the liability and, number two, if that person were liable because they were the owner. When a couple is married for federal and state income tax purposes, it doesn’t matter. It’s all going on the same married filing jointly return. However, if they are not going to have a joint return, then you need to look at the ownership of that property and the expenditure. For things like charitable contributions, you’d have to ask, ‘What is the source of the funds?’”
Another layer of complexity is added if the couple lives in a community property state like California because then the assets are deemed to be owned half and half. “If that’s not recognized for federal income tax purposes, you have an additional complexity in preparing those tax returns,” said Di Re. “So it is really important for that couple to understand how they’re owning the property, how they’re earning the income, and who is paying the tax.”
If the Supreme Court rules DOMA to be unconstitutional, couples and their employers may be able to file a refund claim for prior-year tax returns. Until then, it might be a good idea for their tax practitioners to file a “protective claim” to be on the safe side.
“If we do get DOMA overturned, it will be really important to look at the language to see if it’s overturned for those who are recognized as married in a state, or is it also for same-sex civil unions, and see if there is an opportunity to go back and file a refund claim for prior years’ tax returns,” said Di Re. “If people would have been entitled to be married filing jointly on their federal return for a prior year, as long as the statute of limitations is still open on that year, and the statute is three years from the year when you filed—that would mean today, for the closing of the statute on the 2009 tax year for those who filed by April 15. In advance of getting the ruling, taxpayers can file what’s known as a ‘protective claim’ by today for those years, or by October 15 if they filed on Oct. 15, 2010 for their 2009 return. There may even be an opportunity for employers to get refunds on tax or FICA tax paid on benefits that were taxed going backwards. Of course, we still have to wait for the ruling to see if this would be appropriate.”
Karyn Twaronite, a partner and the Americas inclusiveness officer at Ernst & Young, noted that the firm makes an effort to recruit LGBT employees. “For us, the business case for LGBT inclusion is simple,” she said. “The war for talent in the professional services sector is incredibly fierce, and attracting and retaining LGBT talent is critical to our success.”
She said companies should recognize same-sex married couples the same way they recognize opposite-sex couples. “Many companies treat same-sex married couples differently,” said Twaronite. “They point to federal regulations indicating that same-sex married couples need be identified as domestic partners in benefits processes. For example, some companies will request that married same-sex domestic partners sign an affidavit that they lived with their partner for at least six months, or supply a marriage certificate. Meanwhile, opposite-sex married couples do as little as providing their spouse’s name. This is a matter of equality, fairness and making each person feel valued. When it comes to our communications and our processes, we treat same-sex married couples as just that: married.”
Twaronite also recommended that businesses make a difference through their own policies, as her firm did. “We offer what we call a ‘tax gross-up.’ Since same-sex couples are taxed differently on the value of health and welfare benefits in the United States, Ernst & Young provides a tax gross-up to cover the extra tax paid by same-sex couples,” she said. “This cost can be significant at EY, as the average cost we’ve seen here is about $5,500 per employee.”
Twaronite suggested that companies should work with decision-makers about the inequities they witness as an organization, but can’t address on their own through their internal policies.
Mark Maxwell and Tim Young-Maxwell, a couple in North Carolina, are facing some of these challenges. They married in January in Washington, D.C., but their marriage is not recognized on either the state or national level. As parents of four adopted children, they are not both legally recognized as the children's parents because of DOMA. "We pay twice as much for our accounting fees each year for him to navigate his way through filing our taxes," Young-Maxwell said in a statement. "Because of DOMA, we have to file our federal taxes as if we were single, which creates additional confusing steps that we wouldn't have to do if we were a heterosexual couple. And, because both our state and the federal government don't recognize our marriage, Mark and I have had to split up the family during tax season, which is heartbreaking."