We blogged that “Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples.” This blog expands on that announcement.
In IR 2013-72; Rev Rul 2013-17, 2013-38 IRB, IRS has issued much anticipated guidance explaining the Federal tax implications of the Supreme Court’s landmark Windsor decision striking down section 3 of the Defense of Marriage Act (DOMA), which had required same-sex spouses to be treated as unmarried for purposes of federal law. 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. IRS now says that same-sex couples who were legally married in jurisdictions that recognize their marriages (i.e., “state of celebration”) will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage.
Click here for “Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law.”
Background on DOMA. In ’96, Congress enacted, and President Clinton signed into law, DOMA. Section 3 of DOMA defines marriage for purposes of administering federal law as the “legal union between one man and one woman as husband and wife.” It further defines a “spouse” as “a person of the opposite sex who is a husband or wife.”
Supreme Court opinion. In a majority opinion delivered by Justice Kennedy (joined by Justices Ginsberg, Breyer, Sotomayor, and Kagan), the Supreme Court held that DOMA §3 was an unconstitutional deprivation of equal protection.
Although the Supreme Court’s decision resolved the constitutionality of DOMA §3, it left a number of issues unanswered, including the effective date of its holding and how to resolve conflicting state laws. IRS issued a statement on June 27, the day after the Court’s decision, that it was reviewing the decision and would provide guidance shortly.
IRS adopts “state of celebration” rule. The 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 Sept. 16, 2013. (See the state-by-state list below for operative dates on which same-sex marriage became legal.)
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.
IRS stated that its position is consistent with its earlier guidance on state law variations in marital status. For instance, in Rev Rul 58-66, 1958-1 CB 60, it determined that a couple would be treated as married for purposes of Federal income tax filing status and personal exemptions if the couple entered into a common-law marriage in a state that recognizes that relationship as a valid marriage, and that the couple’s filing status wouldn’t change if they moved to another state that didn’t have common-law marriage. IRS stated that in “our increasingly mobile society, it is important to have a uniform rule of recognition that can be applied with certainty by the Service and taxpayers alike for all Federal tax purposes.” It also noted that adopting a state-of-domicile rule would present serious administrative concerns, for IRS and employers alike. (Rev Rul 2013-17)
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 Sept. 16, 2013 (i.e., Rev Rul 2013-17’s effective date) 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. (Rev Rul 2013-17)
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 Sept. 16, 2013 (i.e., the effective date of Rev Rul 2013-17).
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. (Rev Rul 2013-17)
Odds and ends. IRS also issued a set of frequently asked questions (FAQs) accompanying 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).
Registered domestic partnerships and civil unions. 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. (Rev Rul 2013-17)
Operative dates. The following list was provided by the Social Security Administration. It gives the starting dates (and ranges, as applicable) that various states began permitting same-sex marriage.
California – June 17, 2008 through Nov. 4, 2008, and June 26, 2013 through the present.
Connecticut – Nov. 12, 2008.
Delaware – July 1, 20013.
Iowa – Apr. 20, 2009.
Maine – Dec. 29, 20012.
Maryland – Jan. 1, 2013.
Massachusetts – May 17, 2004.
Minnesota – Aug. 1, 2013.
New Hampshire – Jan. 1, 2010.
New York – July 24, 2011.
Rhode Island -Aug. 1, 2013.
Vermont – Sept. 1, 2009.
Washington – Dec. 6, 2012.
Washington, DC – Mar. 9, 2010.
Other agencies’ positions. The Social Security Administration recently issued guidance stating that, for purposes of determining entitlement to Social Security benefits, claims can be paid when the Number Holder (i) was married in a state that permits same-sex marriage, and (ii) is domiciled, at the time of application or while the claim is pending a final determination, in a state that recognizes same-sex marriage. However, other federal agencies have adopted rules similar to IRS. For instance, Janet Napolitano, Secretary of Homeland Security, issued a statement and two questions and answers (Q&As) following the Windsor decision. In it, she stated that U.S. Citizenship and Immigration Services (USCIS), in considering an immigrant visa petition for a same-sex spouse, “looks to the law of the place where the marriage took place when determining whether it is valid for immigration law purposes.” A similar position was announced on Q&As posted on the Department of State, Bureau of Consular Affairs website.
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