c.2013 New York Times News Service
c.2013 New York Times News Service
It’s now official: Same-sex married couples across the country are allowed to check one of the “married” boxes on their federal tax returns, even if their own state doesn’t recognize their union.
Many of those couples who fought long and hard to win that right may pleasantly find themselves paying Uncle Sam far less and may even get a refund from previous years. (But plenty of others will pay more.)
The Internal Revenue Service this week set down the rules that will cost or save a particular couple money. That will depend on how much they earn, whether both spouses are working, and whether, together, they earn too much to claim the same sort of tax-saving deductions and credits they did when they were filing as singles (many of which phase out as income rise).
The rules also begin to clarify how couples residing in the 37 states that do not sanction same-sex marriages will fare. (Warning: Filing state returns won’t be easy, but not so bad that you’ll consider moving.)
Gay couples can now plan for how their financial lives will change when it comes to federal taxes, even though big questions remain about benefits like Social Security and veterans’ benefits. The ruling applies to a broad range of tax rules where marriage comes into play, and some will result in major savings: Some couples will no longer have to pay thousands of dollars in taxes on the value of their spouse’s health insurance, something their opposite-sex peers did not have to pay. Individuals can inherit a spouse’s retirement account and other assets without any extra tax implications. Nonworking spouses will be able to open an IRA on their spouse’s earnings record. And the list goes on.
“The Supreme Court opened the door to nationwide recognition of same-sex marriage, but the Internal Revenue Service swung it wide open,” said John McGowan, who heads the lesbian, gay, bisexual and transgender practice at Northern Trust.
First the best news: If you would have received a refund by filing a joint federal return, you can generally collect that money for the past three years. (Keep reading, I’ll tell you how below). If you would have owed money, you are under no obligation to pay more.
For the 2013 tax year, all legally married couples will be required to file their returns together as either “married filing jointly” or “married filing separately,” according to the Treasury and Internal Revenue Service, which announced the rules on Thursday. That’s the case even if, for instance, a gay couple legally married in Washington D.C., goes back home to Virginia where gay unions are not allowed.
Here are some answers to several questions that may be on couples’ minds:
WILL I OWE MORE TAXES OR LESS?
Generally speaking, couples will pay less in federal income tax when one person earns much less than the other or does not work at all. High-income couples with two working spouses will probably pay more. That’s the marriage penalty. You’re welcome.
A married same-sex couple in which one spouse earns $100,000 and one stays at home with their child will save about $4,200 in federal taxes by filing a joint federal return, according to Pan Haskins, an accountant in Oakland, Calif., who works with gay couples. (If the same couple lived in a community property state like California, Washington or Nevada, their federal taxes will be the same as married couples in other states, but they will pay about $600 more than they pay now.)
If a couple would have received a federal tax refund if they filed a joint return, they are entitled to claim that money for three years from the date the return was filed or two years from the date the tax was paid, whichever is later, according to the IRS. So generally speaking, most people will be able to amend their returns for 2010, 2011 and 2012. Taxpayers should use IRS Form 1040X, which will allow them to amend your previous returns.
AM I OWED ANYTHING ELSE?
Perhaps. Unlike straight married couples, most gay individuals with same-sex spouses who were covered by their employer’s health plan owed income taxes on the value of that coverage (unless the employer paid them for the employee, which some companies did). In addition, these workers also paid for their portion of the premium using after-tax dollars instead of being able to pay pretax and reduce their taxable income.
If you paid those extra taxes, you can claim a refund on both of those items, according to the IRS (which said it would be issuing streamlined procedures to help taxpayers). So if you paid extra income taxes on, say, $3,000 worth of health insurance annually for each of the past three years, or $9,000, you could get a nice chunk of money back, depending on your tax bracket.
WHAT ABOUT STATE TAX RETURNS?
If you live in a state that recognizes your union, your life just got much easier. Couples residing in places like California, Massachusetts or New York can file a joint federal tax return as well as a joint state return, just as opposite-sex couples do.
But it’s not entirely clear what will happen in each of the states that do not recognize same-sex marriage, experts said, since some states require that a taxpayer’s state return filing status mirror their federal return.
“I love that state taxing authorities are having to wrestle with this,” said Patricia Cain, a professor at Santa Clara University School of Law and an expert on sexuality and federal tax law. “It does remain to be seen, but it is likely that you won’t be filing jointly at the state level” if your state does not recognize your union.
If that’s the case, filing your state tax return will become more cumbersome. Each spouse will probably need to fill out a dummy federal return as if they were filing on their own (either as single or head of household) and then transfer the information on that return to their state return, which also must be filled out as single or head of household, according to tax experts.
“It will be awkward, it will be time-consuming, but not necessarily difficult,” said Nanette Lee Miller, who leads the lesbian, gay, bisexual and transgender practice at Marcum, an accounting firm.
ESTATE AND GIFT TAXES?
Married couples will avoid, or at least defer, paying federal estate taxes because spouses can transfer money and property to each other — both during their lives and after death — without federal tax consequences.
Estate taxes only apply to wealthy couples, since the tax is only paid on an estate that is valued at more than $5.25 million, or twice that for a married couple, according to Scott Squillace, an estate-planning attorney in Boston. So after one spouse dies, nothing is owed and assets may be transferred to the surviving spouse. After the second spouse dies, up to $10.5 million is shielded from the tax, which stands at 40 percent.
“This is really only relevant for couples that have expensive homes, other real estate, private businesses, family farms or just plain wealth in the form of investments,” he said.
Couples should probably check in with lawyers to see if their plan needs to be tweaked. There are certain trusts that were only available to opposite-sex couples that they can now use to maximize the amount of wealth they can pass on to their heirs, he said. State estate taxes will still be owed where gay marriage is not recognized, and they tend to kick in at much lower levels.
Gay couples have until now bumped into the gift tax problem, for example, when they wanted to add a spouse to the title of a home, which was considered a gift. Couples can now transfer money and assets during their lifetime; before anything that exceeded $14,000 per year was considered a taxable gift.
“Even if no taxes were due, it was usually subject to these cumbersome gift-tax filing requirements,” he said. “If they’re married anywhere, now they can do that and not need to file anything.”
Couples who got hit with this in the past can file for a refund (again, generally up to three years) using IRS Form 843.
A same-sex spouse will become the default beneficiary on all qualified retirement plans like pensions and 401(k)s. It is still unclear whether any of this will be retroactive, though the IRS said it will eventually provide more guidance. So if a gay person’s spouse recently died and the surviving spouse did not receive, say, pension payments that a surviving spouse typically receives, they may be entitled to that money, said Todd A. Solomon, partner in the employee benefits practice group at McDermott Will & Emery and author of “Domestic Partner Benefits: An Employer’s Guide.” “Pensions going back is an open question,” he added.
Gay individuals are also now entitled to roll over their deceased spouse’s IRA into their own IRA account, which means they can delay making withdrawals until they are 70 1/2, Cain said, whereas before they had to pull a certain amount of money out over the course of their lifetime.
PREVIOUS TYPES OF UNIONS
Couples in civil unions or domestic partnerships are not viewed as spouses in the eyes of the federal government, nor can they file a joint federal return, even if their state permits them to file jointly, according to senior Treasury officials. If you live in a state that permits civil unions but not same-sex marriage, for instance, you need to get legally married to be treated as a spouse for federal tax purposes.