Erin Miller and her wife may have to pay more income tax this year, but they aren’t about to protest. Quite the opposite.
They are delighted.
The change in their tax situation results from the U.S. Supreme Court’s landmark decision in June in United States v. Windsor, which declared that the Defense of Marriage Act (DOMA) violated the Constitution. The ruling expands the rights of gay couples, but one consequence is that some couples will pay higher taxes.
“I don’t care,” said Miller, a software engineer who lives in Beverly, Mass. “I’m thrilled that DOMA was struck down, regardless of my own, personal situation.”
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Under new rules from the Internal Revenue Service, couples who were married in the District of Columbia or one of the 17 states including Washington, D.C., that recognized same-sex marriage as of Dec. 31, 2013 — must choose either married-filing-joint or married-filing-separate status.
In some cases, either of those two categories will produce a bigger tax bill than if the members of the married couple filed as two singles. They can no longer choose single status, however, which they had to use in previous years in which they were married.
The new rules apply to same-sex couples married in states where such marriages are lawful, even if they live in a state that doesn’t recognize those marriages.
The Supreme Court decision doesn’t change the rules for all same-sex couples. Those living in states that do not recognize same-sex marriages and who were not married in a state that does recognize such marriages must file as singles, regardless of how that affects their tax bill. That’s because domestic partnerships and civil unions, recognized by many states, still do not qualify as marriages in the eyes of the IRS.
Here’s another bit of complexity: Same-sex couples who were married in Utah in the last several days of 2013, after a federal court struck down that state’s ban on same-sex marriages, will be treated as married, the government announced, even though the Supreme Court has stayed the ruling until an appeal is decided.
Married same-sex couples can now generally exclude the cost of employer-provided health insurance for same-sex partners that was reported as taxable income. They also have the option of paying for the spouse’s insurance with pretax money if the employer offers such a benefit.
One wrinkle in the IRS rules — according to Ed Morris, an accountant at Marks Paneth & Shron in New York — is that same-sex couples married in a state that recognized their marriages and who have filed a return since Sept. 15 for an earlier tax year cannot file as single for those years, even if it would be beneficial to do so.
Factors like the relative income of each spouse will affect whether filing as a married couple will lower a tax bill; generally, the bigger the disparity in incomes, the more likely that filing jointly is beneficial, said Julian Block, a tax lawyer in Larchmont, N.Y. If both members of a married couple have high incomes, there is a good chance that they will pay what Block called “a marriage penalty,” a bigger tax bill.
This year’s rules are a huge change from those in previous years, when the IRS did not recognize same-sex marriages performed in states that had legalized them. The change followed the Supreme Court ruling, which struck down the part of DOMA that said the federal government would not recognize same-sex marriages that were legal under state laws.
In that case, Edith Windsor, the survivor in a legally married same-sex couple, challenged the IRS’ denial of her marital status after her spouse’s death. If Windsor had been recognized as the spouse, she would have owed no inheritance tax. Because she was not a spouse under DOMA, she owed $363,053.
The Supreme Court said the part of the law that required the federal government to ignore same-sex marriages was unconstitutional and that Windsor was, thus, entitled to rely on her valid, same-sex marriage to determine her status. Two months later, the IRS issued its new guidelines.
One couple affected by the change is Terry Hueneke and Michael Ross, who live in New York City and were married there last year. They had been living together for more than 10 years.
Hueneke says their accountant is almost certain that they will benefit from filing jointly, because of their disparate income levels. Hueneke is retired, but earns fees as a director of a publicly traded company. He is also an active investor and has capital gains, dividend and interest income.
For 2013, his income was higher than that of his spouse, Ross, who is setting up a knitwear-design business, concentrating on men’s sweaters. Ross also hopes to write about and teach pattern-making. Their income gap could easily shrink or disappear in future years.
The men say they are prepared to pay higher taxes one day if the rules require a marriage penalty, as has been the case for many heterosexual couples. “I think we shouldn’t be in any different situation than any other married couple facing that possibility,” Ross said.
Hueneke noted that marriage could bring tax and financial benefits beyond a given year’s tax bill. Their new legal status, he said, provided “the ability to clarify a number of things and have legal protection.”
Those weren’t the primary reasons for getting married — “there’s love and being together,” Hueneke said.
“Income taxes are one piece, but there are also other ramifications,” he added, including Social Security benefits for spouses, the ability to stretch out minimum required distributions from individual retirement accounts and favorable tax treatment of inheritances — exactly what Windsor fought for in the case that opened the door to the new rules.
As Miller put it, “I’m just thrilled to have the same protections and benefits accorded to me and my family” that other married couples have.
She might come out ahead despite the two-earner marriage penalty because the health-insurance premiums her wife’s employer paid for Miller will no longer be taxed as income.
The Supreme Court did not say whether its ruling was retroactive, but the IRS decided that it was, making some same-sex couples eligible for refunds of previous years’ federal taxes, generally as far back as 2010.
Perry Shulman, an accountant in East Rockaway, N.Y., who specializes in tax preparation and financial planning, said: “There is no one-size-fits-all answer. You have to run the numbers.”
If the change creates an increase, the IRS is not requiring that same-sex couples file amended returns and pay the higher tax. Morris, the accountant, said: “You can go back. If it produces a savings, all well and good. File the amended return and claim the savings. If it’s going to be a detriment to you, leave it alone.”
Amended federal returns for 2010 generally must be filed by April 15 of this year because of the statute of limitations on changes. Returns for 2011 can be amended any time until April 15, 2015, and 2012 returns until April 15, 2016.
Shulman said tax-law commentators think that someone with much money at stake might bring a case arguing that returns for all years in which a same-sex couple was legally married should be amendable.
To amend a return to file jointly, couples would use Form 1040X, calculate their combined income and then recalculate the tax on that income, using the married-couple rate.
The form and instructions have not been updated since the Windsor decision, Morris noted, and the exact procedure that the IRS will prefer is “an uncertain area.” So while couples amending 2010 returns should file by this April 15, he said, those who are amending 2011 or 2012 returns may want to await more clarity.
But the broad picture for many same-sex couples is clear. “It’s about equality under the law,” Miller said.