Proceed with care. That’s what bankers, accountants and wealth managers are telling same-sex couples considering financial changes because of the Supreme Court’s rejection of a federal law denying them benefits.
After years of fighting for equal tax-and-benefit treatment, married couples now await guidance on how the Internal Revenue Service and federal agencies will implement the ruling. Without it, those who file for tax refunds may end up paying more, not less.
Married couples in states that don’t recognize gay marriage and those who delayed filing their 2012 returns in anticipation of the court’s decision in June are pressing for clarity. Spouses computing whether to seek refunds from prior returns see the three-year statute of limitations for amendments closing as they look to the IRS for details.
“We are desperately awaiting that guidance,” said Shari Levitan, chairwoman of the New England private wealth services group at Holland & Knight LLP in Boston. “The major question for clients is for returns that are still open, and even those that are beyond the statute of limitations, can they be amended?”
Without IRS guidance, couples who extended their 2012 return deadline to Oct. 15 and who live in a state that doesn’t recognize their marriage will probably file their federal returns jointly and disclose they are doing so based on the court’s decision, Levitan said. She serves high-net-worth clients, about 10 percent of them same-sex couples.
“That’s a risk,” because the IRS could deem they filed incorrectly, she said.
The IRS said June 27 that it was reviewing the court’s decision and would “move swiftly to provide revised guidance in the near future.” The agency referred to this statement when asked yesterday to comment on the timing of any guidance.
Amending returns may subject some same-sex couples to higher taxes because of the so-called marriage penalty, which generally affects taxpayers when one or both are in the top income-tax bracket, or if both make relatively similar salaries. It also could open tax returns to scrutiny.
“You have to make sure there’s nothing else in your return that would cause the IRS to look at it,” said Nanette Lee Miller, co-head of New York-based accounting firm Marcum LLP’s practice for gay, lesbian, bisexual and transgender couples.
While the IRS generally hasn’t looked at all returns within the three-year statute of limitations when people amend for a particular year, they could, Miller said.
“That’s why a lot of people are waiting for guidance,” she said.
The U.S. high court struck down the core of the 1996 Defense of Marriage Act, which defined marriage as a union between a man and a woman. The decision didn’t legalize same-sex marriage nationally, leaving regulators to answer questions about residency and retroactivity as it applies to federal tax returns, refunds and benefits.
Same-sex married couples’ finances were complicated by DOMA. They were able to file jointly in states that recognized gay marriages while having to file individual federal tax returns because the U.S. government treated them as single. The division between federal and state law also affected employee benefits, estates and transfers of assets between spouses.
A primary reason for same-sex couples to amend their returns may be if an individual received employer-provided health coverage for a spouse and was required to include the value of that insurance as income, and pay taxes on it, which other married couples weren’t required to do, said Derek Dorn, a partner at Davis & Harman LLP in Washington.
In that case, people may want to wait and see if the IRS will require them to change their filing status to married, which could trigger higher total taxes for prior years, Dorn said. He also is outside counsel to the Human Rights Campaign, which advocates for lesbian and gay Americans.
Spouses each making $100,000 or more a year probably will be subject to a marriage penalty because of how income-tax brackets are set for couples compared with singles. By comparison, where one person earned $175,000 and the other $25,000, they would probably see a benefit to filing jointly.
“You may have some good for some couples but also some bad lurking out there,” said Levitan of Holland & Knight.
Advisers including Levitan want the IRS to clarify what happens when couples reside and own a home in a state such as Massachusetts, which recognizes gay marriages, as well as a vacation property in Florida, which doesn’t.
“Do we have to treat that property differently for marital deduction purposes because it’s subject to Florida law?” she said.
States will wait to make changes until they see the IRS guidance, said Verenda Smith, deputy director at the Federation of Tax Administrators.
The decision won’t affect the way same-sex couples in California are required to file their state-tax returns because the state generally affords the same rights to those individuals as other spouses, Daniel Tahara, a spokesman for the state’s Franchise Tax Board, said in an e-mail.
In Washington state, which allows gay marriage, the Supreme Court’s decision means same-sex spouses may qualify for a refund of the state’s estate tax even if they were married in another jurisdiction, Kim Schmanke, a spokeswoman for the state’s revenue department, said in an e-mail.
In Arizona, which doesn’t recognize same-sex marriages, the state-tax filing process won’t change, said Sean Laux, a spokesman for the Arizona Department of Revenue. Married-filing-jointly or married-filing-separately returns wouldn’t be allowed for same-sex couples, Laux said. Those who are non-residents with earnings in Arizona would file as single people to report income apportioned to the state, he said.
“We’re waiting to see what the feds decide on how to treat where the married couple lives or where they got married,” Laux said. “That will impact the things we and other states have to deal with.”
The most significant savings for gay married couples generally will come from the ability to now use the unlimited marital deduction for federal estate-and-gift tax purposes, said Geoff Seaman, a strategist for the Bank of New York Mellon Corp.’s wealth management unit.
The DOMA case hinged on the issue of federal estate taxes. It involved New York resident Edie Windsor, who sued the federal government over a $363,000 estate-tax bill imposed after her spouse died. Other married couples aren’t liable for estate taxes until the second spouse dies.
Those who paid levies when their spouse died or made gifts to a partner should review their returns -- even beyond the three-year statute of limitations, said Seaman, whose clients usually have at least $25 million in net worth. The potential refund may be big enough to be worth making a claim, he said.
Married gay couples have started to combine their property, cash and investments even while waiting on IRS guidance before amending or filing federal tax returns, said Alexander Popovich, a wealth adviser in the private bank unit of New York-based JPMorgan Chase & Co. (JPM)
Some have shifted to joint checking and brokerage accounts or re-titled real estate, he said. Before the court’s decision, couples were advised to keep assets separate because transfers between them could be subject to gift taxes, unlike for opposite-sex spouses.
In states that recognize gay marriage the implications of the court’s decision are clearer, Popovich said. It’s a good time to review the beneficiaries of accounts, titles on property, and clauses in wills or trusts, he said.
“Make sure what you’ve done still makes sense,” he said.
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