Same-sex marriage and the Supreme Court – What about the IRS and taxes?

WASHINGTON, D.C. - Now that the U.S. Supreme Court has ruled that the federal government cannot treat their marriages differently that heterosexual marriages, should same sex married couples file income taxes as "married filing jointly," "married filing single," or "single?"It depends.

On Wednesday morning, the Court announced its ruling that part of a federal law that defines marriage as only being between opposite sex couples. The 5-4 ruling will likely mean that gay couples who are legally married under a state's laws, would be able to receive the same federal healthcare, taxes and pension benefits and obligations as other married couples.

Early interpretation of the ruling does not mean that states would be required to recognize gay marriages performed in other states, if those provisions are not allowed in their own state. However, clarification is still needed on whether gay couples who are married in a state that allows it, but who move to a state that doesn't, would file tax forms based on different marriage status for federal and state taxes.

The primary case before the Court was based on estate taxes that the federal government claimed was owed by a gay widow, 83-year-old Edith Windsor of New York. She had previously sued to challenge a $363,000 federal estate tax bill after her partner of 44 years died in 2009.

Windsor married Thea Spyer in 2007 after doctors told them Spyer would not live much longer. Spyer had suffered from multiple sclerosis for many years and, upon her death, left everything she had to Windsor. With the ruling, Windsor will not have to pay those estate taxes.

What Will it Mean for Income Taxes?

“One of the big open questions is that there are two ways the ruling can be interpreted, depending on how the Administration interprets things,” Greg Mermel, a Certified Public Accountant, told CPA Practice Advisor. He runs a a firm in the Lakeview area of Chicago (www.gregmermel.com.) “In a state that recognizes gay marriage, civil unions or domestic partnerships, married gay couples will likely be able to file either jointly or separately with their state and the IRS.”

For same-sex couples who married in states that recognize it, but lived or moved to a non-recognizing state since then, the question is much murkier, Mermel noted. His firm has long served clients in the performing arts, both from the Chicago area and around the country, who travel broadly, and thus rely on him for knowledge of multi-state tax laws.

“Will federal filing requirements be the same as it is at the state level? Is the ruling going to say that the IRS will follow whatever the marital laws are of the state that couple happens to live?” He said this is what the IRS did prior to the Defense of Marriage Act.

“If they go back to that old criteria, the state a person lives in, which is also the same as it was during the Loving case over inter-racial marriage, at least they would have consistency in - state and federal would stay the same-

Some Same-Sex Married Couples May Face Higher Taxes

“Be careful what you wish for,” Memel added. “For some of my clients, comparisons have shown that, in many cases, their combined ‘married’ taxes would be higher than if they were able to file as single. And there are considerations on income caps and phase-outs for tax credits.”

Elisha Wiesenberg, CPA, agrees. “It’s going to take some time to see how the chips fall, and it depends on how the IRS implements the ruling across the states,” he said to CPA Practice Advisor. Wiesenberg is a principal of Los Angeles-based accounting firm Wiesenberg & Company (www.cpafirmla.com).

She noted that many couples, whether opposite-sex or same-sex, already consider tax implications of marriage before they take their vows. This can be especially true for those with higher incomes.

“Most of my clients have income levels on the higher side, and for many of them, the difference in federal taxes can be considerable, Wiesenberg added. “For some same-sex couples, the difference can be as high as $10,000 to $20,000.”

As a result, he said, some California same-sex married couples might consider the financial aspects of moving to a state like Nevada, which does not have a state income tax, and also does not recognize gay marriages. Depending upon implantation of the Supreme Court’s ruling, those couples might be recognized as single, following Nevada’s statutes.

Overall, however, both CPAs agreed it appears that the Court’s action will make filing taxes easier, whether for do-it-yourself filers, or tax professionals.

“It will simply things and level the playing field," Wiesenberg said.

On Wednesday morning, the Supreme Court also left in place a trial court's declaration that California's Proposition 8 is unconstitutional. Proposition 8 was a referendum that passed after the state’s highest court had ruled that gay marriage should be permissible.

With the Proposition overturned by the lower court and no change by the Supreme Court, Governor Jerry Brown has announced that the state can continue to marry couples of either gender and that it shall be enforced in all counties.

In neither case did the Court endorse same-sex marriage, and a separate provision of the federal marriage law that allows a state to not recognize a same-sex union from elsewhere remains in effect.

President Barack Obama praised the court's ruling on the federal marriage act, which he labeled "discrimination enshrined in law."

"It treated loving, committed gay and lesbian couples as a separate and lesser class of people," Obama said in a statement. "The Supreme Court has righted that wrong, and our country is better off for it."

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