Supreme Court Decision Means More Options & Decisions for Same-Sex Couples
Author: Robbie Connell
With the U.S. Supreme Court’s June 26, 2015, decision in Obergefell v. Hodges, same-sex couples no longer need to fear losing their marriage status while crossing state lines, as all marriages will be recognized across the country. This decision affects the application of many state tax laws, as same-sex marriages previously were recognized only in certain states.
For federal tax purposes, same-sex marriages were recognized with the issuance of Rev. Rul. 2013-17, made effective September 16, 2013. The Revenue Ruling was issued after the U.S. Supreme Court decided in Windsor v. United States that Section 3 of the Defense of Marriage Act was unconstitutional because it excluded same-sex couples from using the terms “married, husband and wife, and spouse,” if they had legally married in a state that recognized such marriage.
Beginning in 2012, the IRS recognized same-sex marriage for federal tax purposes. If a couple was legally married in a jurisdiction that recognized the marriage—regardless of where they resided—and they had not filed their federal tax return (including income, gift and estate) by September 16, 2013, they should have filed either married filing joint or married filing separate for the 2012 tax year. If their tax return was filed before this date, they should have filed as two single taxpayers, but they did have the option to amend if there would have been a favorable outcome.
The Windsor decision allowed couples to amend their prior returns to take advantage of federal tax savings using the married filing joint or married filing separate filing statuses. The Obergefell decision expanded this to include amending previously filed state tax returns. However, amending is an option, not a requirement. In general, the deadline for filing amended returns to claim refunds is the later of three years from the original return filing date or two years from the tax payment date. Going forward, same-sex married couples must file as married filing joint or married filing separate on both their state and federal tax returns.
Same-sex couples who are not yet married may be considering the tax consequences of tying the knot, as married same-sex couples now are required to file as either married filing joint or married filing separate. The income tax brackets for single versus married taxpayers are not fairly adjusted. Married taxpayers reach the highest marginal tax rate of income at well less than double the income of a single taxpayer. In 2014, single taxpayers paid the highest marginal income tax rate at 39.6 percent for all income more than $406,751. Married couples reached the 39.6 percent rate on all collective income more than $457,601. This is commonly known as the “marriage penalty,” as two married taxpayers pay a higher rate of tax on their joint earnings than if they were both to file single.
In certain circumstances, married couples may bypass this penalty by filing married filing separate on their returns, but the tax rates generally are higher for the married filing separate status, and credits such as adoption, education, child care and earned income aren’t available. One might think that filing as married filing separate would get them the tax rates of a single taxpayer, but the rates of married individuals filing separately are exactly half the rates for married couples filing jointly, which typically doesn’t offer a tax advantage. Also, the couple filing as married filing separate may have to pay more in tax preparation fees than a couple filing joint, since there would be two tax returns to prepare.
However, there are some instances when married filing separate has advantages over filing jointly. If one spouse had significant medical expenses, it may be advantageous to file as married filing separate in that tax year. Medical expenses only are deductible if the amount meets at least 10 percent of a taxpayer’s adjusted gross income. This may be a difficult threshold to meet when the couple files jointly, as combined earnings would be considered in passing this test. However, if they were to file separately, their individual earnings would be used to meet the threshold. Also, a couple considering a divorce may find it advantageous to file separately to disconnect and avoid potential fights regarding tax issues as well as relinquish their personal liability for the joint tax.
It may sound like doom and gloom for married taxpayers filing jointly, but there are actually many tax advantages to this filing status. Some of these advantages, previously only available to opposite-sex couples, include:
- Adoption credit
- Child and dependent care credit
- Earned income credit
- Deduction for tuition and fees
- Contributions to individual retirement accounts
- Spousal health insurance coverage
- Employee benefits
- Inheritance or property rights
An issue mentioned in the Obergefell case was that a married same-sex couple residing in Michigan, a state that formerly did not recognize their marriage, was prevented from both being legal parents of adopted children, since only opposite-sex married couples and single individuals could adopt. This posed major problems, as only one spouse would have legal rights over the child in the event of a tragedy. The Obergefell decision alleviated this issue since same-sex married couples are recognized in all states. Unfortunately, the adoption credit isn’t available for spouses adopting the child of the other spouse.
Another factor to consider when deciding the best filing status is community property laws. Community property usually refers to any property gained during a marriage that isn’t considered separate property. Separate property is any property a taxpayer owned before the marriage or any property that is a gift, bequest, devise or inheritance or property purchased from separate property funds.
There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If a married couple residing in one of these states decides to file as married filing separate, each spouse generally must report half of the earnings and half of the deductions from their community, regardless of who actually earned or paid these amounts. Since the tax rates generally are higher for married filing separate filers, the couple may end up paying a larger amount of tax than if they filed jointly.
Your tax advisor can assist you in deciding whether it would be more advantageous to file as married filing joint or married filing separate as well as assisting in amending prior returns due to the recognition of same-sex marriages for federal taxes beginning in the 2012 tax filing year. For other questions concerning the tax implications for same-sex married couples, visit the IRS frequently asked questions webpage.
If you have questions or concerns regarding the married filing joint or married filing separate statuses, contact your BKD tax advisor.