IRS Recognizes Same-Sex Marriage for Tax Purposes

 

2013 ushered in many changes in the New Year, among them the legalizing of same-sex marriages in Maryland. Now, legally married same-sex couples in Maryland will receive the same benefits (and headaches) as their friends in heterosexual marriages, under the new Rev. Rule 2013-17.

On August 29, 2013, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) jointly announced Rev. Rule 2013-17 which treats legally married[1] same-sex couples as married for federal tax purposes. The new policy applies to all same-sex couples who were married in a jurisdiction that recognizes same-sex marriage, even if the jurisdiction they currently reside in does not recognize same-sex marriage.

The ruling applies anywhere marriage is a factor, including but not limited to filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, claiming the earned income tax credit or child tax credit, and employees who purchased health insurance coverage from their employers.

Generally speaking this means that, beginning in the 2013 tax year, legally married same-sex couples must now choose either the “married filing jointly” or “married filing separately” status on their tax returns. Same-sex spouses that have not yet filed their 2012 federal income tax return will also have the option of filing as married or not married.

Many couples will see a benefit in the terms of their year-end refund. For instance, employees who purchased pre-tax employer-sponsored health insurance for their spouse can now treat that payment as tax free for federal income tax purposes. The participating employee can file a refund claim for the income taxes paid on those spousal coverage premiums.

Couples who were in same-sex marriages in the previous three (3) years may file amended returns and claim additional deductions/tax filing status. Generally, the statute for filing a refund claim is three years from the date of filing or two years from the date upon which the tax was paid, whichever is later. However, this may subject some spouses to the “marriage penalty” where married couples may end up with a higher tax bill as a result of filing jointly than if they filed as single people.

In addition, the new policy extends to retirement plans and estates. Same-sex surviving spouses will now be entitled to inherit the estate of their late husband or wife tax-free. Qualified retirement plans now “must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.”

These new rules are equally as important to same-sex couples who are going through a separation. In any divorce, issues revolving filing status, claiming dependency exemptions for the minor children and distribution of retirement accounts undoubtedly arise.

After a separation, under the new rule, a same-sex spouse who has lived apart from their spouse for the last six (6) months of the taxable year, and provides more than half the cost of maintaining the household where the minor child resides, may be considered unmarried and may use the “head-of-household” filing status.

In addition, a same-sex spouse may be eligible to claim any minor children as dependents on their tax returns. Generally, the IRS will treat the parent who has the child for the majority of the time as the eligible parent for this deduction. If the child lives with both parents for an equal amount of time, the IRS will generally give the deduction to the parent with the higher adjusted gross income.

Prior to this ruling, same-sex couples faced potentially additional headaches regarding whether their spouse’s employer sponsored retirement plan would recognize their claim. The IRS has made it clear that not only must the plan treat a same-sex spouse as a spouse but that this new policy extends to qualified domestic relations orders as well. In the event that a domestic relations order assigns a participant's retirement benefits to a spouse, the plan administrator must honor it.

For more information on this topic, please see:

TaxProfBlog.com

KPMG.com

 

[1] While the ruling recognizes all legal marriages, it does not apply to civil unions, domestic partnerships, or other formalized relationships that are not marriage.

 

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