In reaction to a landmark Supreme Court ruling involving the tax implications of same-sex marriages, the United States Treasury and the Internal Revenue Service (“IRS”) have issued much anticipated guidance explaining the federal tax implications of the Supreme Court’s Windsor decision, striking down Section 3 of the Defense of Marriage Act, signed into law by President Bill Clinton, which had required same-sex spouses to be treated as unmarried for purposes of federal law.
The Supreme Court’s Holdings
On June 26, 2013, the last day of the then current term of the U.S. Supreme Court, the Court released opinions in two cases addressing the rights of same-sex couples. The first, California’s Proposition 8 ban on gay marriage, which led to the Court’s ruling in Hollingsworth v. Perry, 133 U.S. 2652, 2013 WL 3196927 (2013), and the second, the Defense of Marriage Act (“DOMA”), leading to the ruling in U.S. v. Windsor, 111 AFTR 2d 2013-2385 (2013). By a margin of 5 to 4, the Supreme Court found Section 3 of DOMA to be an unconstitutional deprivation of “equal protection.” In the Hollingsworth case, the Supreme Court vacated California’s ratification of Proposition 8 on a legal technicality without commenting on its validity, potentially leaving open an avenue for same-sex marriage to be recognized at both the federal and state levels in all states should a case based upon similar facts once again come before the Court.
The IRS’ Response to Windsor
With respect to the issue of DOMA, the Supreme Court stated in Windsor that its holding was confined to “lawful marriages,” the meaning of which was one of the most significant uncertainties left to be resolved by IRS for purposes of applying the Court’s holding to tax law administration. In issuing Revenue Ruling 2013-17 (IR 2013-72; Rev. Rul. 2013-17, 2013-17, 2013-28 IRB) IRS now says that same-sex couples who were legally married in jurisdictions that recognize their marriages (i.e., the “state of celebration”) will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage. As a result, same-sex partners residing in North Carolina, the Commonwealth of Virginia, South Carolina, Georgia, or any other jurisdictions that either does not recognize or has otherwise banned same-sex marriages will still receive the benefit of the IRS’ favorable tax guidance.
Although the Supreme Court’s decision resolved the constitutionality of Section 3 of DOMA, the Court left a number of issues unanswered, including the effective date of its holding and how to resolve conflicting state laws.
The “State of Celebration” Rule
The so-called “State of Celebration Rule” adopted by IRS is that a same-sex couple that was legally married in a domestic or foreign jurisdiction that recognized their marriage will be treated as married for federal tax purposes, regardless of where they currently live. Treasury Secretary Jacob L. Lew described the ruling as assuring “legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.” The ruling covers same-sex marriages legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country, and it applies prospectively as of September 16, 2013.
This treatment applies for all federal tax purposes-including income, gift, and estate taxes-and to all federal tax provisions where marriage is a factor. These include filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.
Special Considerations for Married Same-Sex Couples
- Filing status change mandatory going forward. Legally-married same-sex couples generally must file their 2013 federal income tax return using either “married filing jointly” or “married filing separately” status. This filing status change may either result in an increased liability (“marriage penalty”) or a decreased liability (“marriage bonus”). IRS also provided that for tax year 2012, same-sex spouses who file an original tax return on or after September 16, 2013 generally must file using a married filing separately or jointly filing status.
- Amended returns can be filed within limitations period. Individuals who were in same-sex marriages are permitted, but 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 on refunds (in general, three years from the date the return was filed or two years from the date the tax was paid, whichever is later). Thus, refund claims may generally be filed for the 2010, 2011, and 2012 tax years. Some taxpayers may be able to file refund claims for earlier years if certain special circumstances (e.g., an extension of the limitations period) apply. IRS also clarified that employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income, and file refund claims based on this exclusion for years for which the limitations period remains open.
IRS intends to issue future guidance for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. IRS also intends to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before September 16, 2013.
- Effect on terminology in the Code. In light of the Windsor decision, IRS has concluded that gender-neutral terms in the Code that refer to marital status, such as “spouse” and “marriage,” include an individual lawfully married to a person of the same sex and a lawful same-sex marriage. In addition, IRS also determined that the terms “husband” and “wife” (used separately or together) should be interpreted to include same-sex spouses.
- IRS Publishes List of FAQs. IRS also issued a set of frequently asked questions (FAQs) accompanying the issuance of Rev. Rul. 2013-17. Many of the FAQs apply established law concerning married couples to legally married same-sex couples, including that a taxpayer’s spouse cannot be a dependent of the taxpayer (FAQ No. 4); a taxpayer who is considered married cannot file using head of household filing status (FAQ No. 5); if spouses file as married filing separate and have a child, only one can claim the child as a dependent (FAQ No. 6); and no adoption credit may be claimed for adopting the child of a taxpayer’s spouse (FAQ No. 8). The FAQs also provide guidance to employers on how and when to file refund claims (FAQs Nos. 10-14), as well as clarification on how the new guidance applies to qualified retirement plans (FAQs Nos. 16-19). You may see the IRS’ FAQs here.
No Application to Registered Domestic Partnerships and Civil Unions
Despite the sweeping effect Rev. Rul. 2013-17 will have for married same-sex partners, for federal tax purposes, the term “marriage’ doesn’t include registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under that state’s law. Additionally, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals who have entered into such a formal relationship. IRS noted that this treatment applies regardless of whether individuals who have entered into such relationships are of the opposite sex or the same sex.
For More Information
For more information on estate planning for same-sex domestic partners, the Supreme Court’s rulings in Hollingsworth and Windsor, or the effects of Revenue Ruling 2013-17 contact the attorneys at Hickmon & Perrin, PC at 980-939-0265.