On August 29, the IRS issued Revenue Ruling 2013-17 clarifying that same-sex couples married in jurisdictions that recognize same-sex marriage will be treated as married for federal tax purposes - regardless of where they reside. The ruling is in response to the U.S. Supreme Court's June decision thatdeclared certain sections of the Defense of Marriage Act unconstitutional.
The tax impact
The Supreme Court's decision in United States v. Windsor requires same-sex marriage to be recognized federally only if it's recognized by the couple's state of residence. So if a same-sex married couple was legally wed in a state allowing such unions but resides in - or subsequently moves to - a state that doesn't recognize them, the Court's decision doesn't require the federal government to recognize the marriage.
Under the IRS ruling, these couples will be treated as married for all federal tax provisions in which marriage is a factor, such as filing status, claiming personal and dependency exemptions, tax-advantaged treatment of certain employee benefits, IRA contribution limits, claiming the child tax credit, and gift and estate tax breaks such as the marital deduction and exemption portability.
While in many situations treatment as a married couple provides significant tax advantages, in some situations it can produce a marriage "penalty." The IRS ruling essentially requires same-sex spouses whose marriages are recognized at the federal level to change their tax filing status from single to married (married filing jointly or separately at the election of the taxpayers), generally beginning with the 2013 tax year; however, 2012 returns on extension filed after September 16, 2013 must also be filed using married status. When both spouses have healthy amounts of taxable income, they can owe a larger combined federal income tax bill than if the two individuals filed as single taxpayers.
It is important to note that the revenue ruling does not apply to couples living in states that recognize civil unions. For example, while New York and Connecticut recognize same sex marriages, New Jersey only recognizes civil unions (and not same sex marriages).
Same-sex married couples have much to consider. First, they should evaluate how changing their filing status from "single" to "married" will affect their 2013 tax liability and then take steps before year end to maximize the tax-saving opportunities and minimize any negative consequences. Second, they need to review their estate plans and determine whether any changes are warranted to take advantage of the federal gift and estate tax benefits available to married couples.
Finally, they'll want to determine whether they can receive a tax refund if they file amended returns as a married couple for previous years. There may also be an opportunity to amend prior year returns to recover tax paid on the value of employer sponsored health insurance and gift taxes paid on transfers between spouses.
If you're affected by the IRS ruling, we'd be pleased to help you assess the tax impact and determine the specific steps you should take.
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