The Tax Impact of Same-Sex Marriage

When the Supreme Court tossed out section 3 of the Defense of Marriage Act last month in Windsor vs U.S., it gave same-sex couples an important civil rights victory.

It also gave gay and lesbian couples the opportunity to navigate the complex world of federal taxes and benefits for married couples.

(Intuit, Mint.com’s corporate parent, signed a friend-of-the-court brief in support of same-sex marriage.)

I’ll be checking in regularly on the personal finance aspects of the decision, and this week I’d like to talk about federal income taxes.

Many questions remain open, because the implementation of the court decision is up to assorted federal agencies: the IRS, the Department of Labor, the Social Security Administration, and dozens more.

Here’s what we know now, which is not much. When I refer to a married couple below, I’m talking about a same-sex couple.

From state to state

Married same-sex couples living in a state where gay marriage is legal must file as “married” on their 2013 federal tax return.

If you got married in Washington state and still live in Washington or in, say, Iowa, you may file as married filing separately or married filing jointly but not as single.

For all married couples, same- or opposite-sex, married filing separately is usually a bad idea, because it makes you ineligible for all sorts of tax deductions and credits. See IRS publication 17 for details.

If you marry in one state and move to another state that doesn’t allow same-sex marriage, your filing status is unknown at this point.

An IRSspokesperson pointed me to a no-comment press release. “[W]e will move swiftly to provide revised guidance in the near future,” it reads.

How swiftly is swiftly? They wouldn’t say. But let’s try to read the tea leaves anyway.

The legal question here is whether the IRS will use a state of residence or place of celebration standard to determine whether a couple is married.

If they choose the state of residence standard, a couple who marries in Iowa and moves to Kansas will be considered unmarried for tax purposes because Kansas doesn’t allow same-sex marriage.

Under the state of celebration standard, the IRS would consider the couple married no matter where they move.

It’s pretty obvious to me that the state of residence standard is not only unfair but, to put it in terms the IRS cares about, presents an easy way to legally cheat on your taxes by claiming residency in whichever type of state (marriage or non-marriage) presents a lower tax bill in any given year.

“We’re aware of no statute or even regulation that would preclude using the place of celebration standard,” says Susan Sommer, director of constitutional litigation for Lambda Legal Foundation.

“So we’re hopeful that there’s no impediment to the IRSfollowing that far more fair and appropriate standard.”

Amending the past

If the IRS considered you unmarried in previous years but now considers you married due to the DOMA decision, you may be eligible to file amended returns going back to 2010.

Say you got married in Massachusetts in 2010 and have filed individual federal returns for 2010, 2011, and 2012.

Now the federal government understand that, hey, you’re actually married, and it turns out your tax bill should have been lower in previous years.

You can file amended returns using Form 1040X. This will keep CPAs, financial advisors, and tax lawyers plenty busy.

This brings up two related questions.

The IRS makes it easy for taxpayers to file for a six-month extension on submitting their tax return. It’s not an extension on any tax owed, just the paperwork.

But say you’re a married same-sex couple, and you were prepared to file two single federal returns in April, under DOMA. But you received an extension this year.

Now, DOMA is dead and you’re eligible to file as married.

How does that affect the 2012 return you’ll be filing in October? Do you have to file single returns and then immediately petition for an amended return? That’s crazy, right?

We just don’t know the answer. “A couple in that situation should certainly seek tax guidance from their own tax advisor,” says Sommer. “But let’s hope the IRS gives more guidance as well.”

Finally, when the decision came down, lots of people made jokes about gay couples becoming eligible for the federal “marriage penalty.”

The assumption behind the term and the joke is that married couples pay more in tax filing jointly than they would have filing as singles. And that if this is true, it’s obviously a piece of misguided policy.

The marriage penalty is a real thing, but it affects a minority of marriages. Congress got rid of it for most middle-class families in 2003.

Nowadays, it affects mostly high-income and low-income couples where both spouses bring home a paycheck. (I was surprised to find that my family paid a small marriage penalty in 2012.)

Why would Congress impose such a penalty? Is it to discourage marriage?

Of course not. It’s part of having a progressive tax system.

Bringing a paycheck-bearing spouse into the house makes both spouses wealthier, and under our tax system, we ask wealthier families to pay taxes at a higher rate.

We also offer married couples special benefits, among them the right to collect Social Security survivor benefits and the ability to give unlimited gifts and inheritances to each other without paying tax.

Estate tax was, in fact, the issue behind Windsor vs U.S.

We’ll look at those, and other financial effects of the decision, in a future column, and update you when the IRS decides whether you can move to Texas to avoid the marriage penalty.

Matthew Amster-Burton is a personal finance columnist at Mint.com. His new book, Pretty Good Number One: An American Family Eats Tokyo, is available now. Find him on Twitter @Mint_Mamster.