The U.S. Department of the Treasury and the Internal Service announced today that legally married same-sex couples will be treated as married for federal tax purposes regardless of whether the couple lives in a jurisdiction that does or does not recognize same-sex marriage.
This announcement follows the U.S Supreme Court’s decision on the Windsor case which ruled Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional. Previously, Section 3 of DOMA limited the federal definition of marriage as between a man and a woman, preventing same-sex couples who are legally married under state laws from being treated as married for federal tax purposes. Because of the ruling, the federal government had to look at state law to determine marital status. For legally married same-sex couples living in one of the 13 states that recognized same-sex marriages this determination was simple- they would be considered married for federal purposes and treated no differently than opposite-sex married couples. However, for same-sex couples legally married in one state but with one or both spouses either living or working in another state, the answer was not so clear. Would the federal government apply the laws of the state in which the couple lived to determine marital status (place of domicile), or would the federal government apply the laws of the state in which the couple was married (place of celebration)? The announcement today clarifies the IRS’s position -- the place of celebrationdetermines a couple’s marital status.
The effect of this announcement, detailed in Revenue Ruling 2013-17 will be far reaching for married same-sex couples living in the 37 states that do not recognize same-sex marriages. Most significant is the ability to file joint tax returns, which allows couples to net income and deductions, qualify for certain credits, and take advantage of certain income exclusions such as the gain on sale of primary residence exclusion. Additionally, benefits such as employer provided health insurance, HSA and flex spending arrangement plans, which had previously been taxable income to same-sex couples, will no longer be includible in income for legally married same-sex couples. Couples will also be able to create family partnerships, make unlimited tax-free gifts to their spouses, and take advantage of other estate tax provisions such as portability and marital deduction trusts that were previously unavailable.
The IRS announcement also clarifies that those individuals who were in same-sex marriages may, but are not required, to file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations. Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Taxpayers (with good accountants) who previously filed protective refund claims to keep the statute of limitation open are also permitted to go back and file claims for these tax years as well.
It is important to note that this ruling applies to any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
This announcement marks a huge change for married same-sex couples living in states such as Pennsylvania and New Jersey that do not recognize same-sex marriages. The changes in gift and estate tax treatment for couples now means that wills and estate documents must be reviewed and updated to take advantage of the recently afforded provisions. Additionally, the change in federal tax filing status can have a serious impact on a couple’s tax liability, either positive or negative. The Tax Warriors at Drucker & Scaccetti have significant experience in these areas and a dedicated LGBT practice that can help you understand the law and apply your fact situation. Please call us at 215-665-3960 or use the button below to “Ask a Tax Warrior” your question!