Kat Morgan will check a “married” box on her federal tax return next year for the first time since her 2009 wedding, now that the Internal Revenue Service will recognize same-sex marriages no matter where couples live.
Her South Carolina income tax return will be another matter, because of the state’s constitutional prohibition against treating her marriage as legal. She and her wife, Daena Petersen, will probably need to create dummy federal tax returns used only to fill out separate state tax forms, on which they will each declare themselves single.
“Annoying doesn’t begin to capture how it feels,” said Morgan, a 50-year-old nonprofit professional in Charleston who was married in Vermont and moved to South Carolina for her wife’s job earlier this year. “Every time I have to check that box, there’s a disconnect between what’s reality and what’s recognized here in South Carolina.”
The IRS’s decision last month to recognize all same-sex marriages is reversing the scenario that had been in place. Until now, same-sex couples in states that recognize gay marriage filed joint state returns as well as separate federal returns declaring themselves single. The burden of enforcing laws at odds with federal policy now falls on states such as South Carolina that prohibit same-sex marriage.
“What happened before in marriage-equality states was that those states had to find a way to undo the discrimination at the federal level,” said Ruth Mason, a tax law professor at the University of Virginia. “Now you have states that don’t want to recognize same-sex marriages trying to redo the difference.”
Residents of states such as Massachusetts and Connecticut that legalized same-sex marriage will no longer have to combine separate federal tax returns for their joint state filings.
Instead, those who will have to split returns are same-sex couples who were legally married in one of 13 states, the District of Columbia or a foreign country and now live in a state that doesn’t recognize their marriage. Residents of states such as Oklahoma, Utah and Wisconsin will have to use different rules for their state and federal tax returns, adding complexity and cost. It’s prompting state officials to write new rules and come up with new tax forms.
“It has sort of flipped the states,” said Verenda Smith, deputy director of the Federation of Tax Administrators, a Washington-based association of state revenue officials.
There are more than 130,000 married, same-sex couples in the U.S., according to estimates from the 2010 Census. Many of them will pay more in taxes, because of the so-called marriage penalties in the tax code for couples with relatively equal incomes.
In states that recognize same-sex marriage, the new system will be easier, because the federal and state returns will be as seamless as they are for opposite-sex couples.
Some states without same-sex marriage, such as Oregon, allow joint income-tax filing by registered domestic partners. Other states that prohibit same-sex marriage, such as Florida and Texas, don’t impose income taxes.
That narrows the conflict to 24 states that don’t recognize same-sex marriage and also have state income tax systems that refer to definitions or income data from the federal government, according to the Tax Foundation. The nonprofit group in Washington tracks state tax policy and advocates for simpler tax rules.
Some states will be able to provide rules for taxpayers administratively. Others may need to amend state laws that require taxpayers to use the same federal and state filing status and are now at odds with state constitutions.
Wisconsin made the first such ruling, announcing that it would soon issue a new tax form, “Schedule S: Allocation of Income to be Reported by Same-Sex Couples Filing a Joint Federal Return.”
States must act quickly. Starting Sept. 16, the IRS will prohibit same-sex married couples from filing individual returns. That means couples who received extensions through Oct. 15 for their 2012 tax returns will face the conflict immediately, without the help of guidance from their states.
Then, tax filing for 2013 will open in January 2014 -- before many state legislatures convene.
Stephanie Cheek, a spokeswoman for the South Carolina Department of Revenue, said officials are reviewing the issue. Charlie Roberts, a spokesman for the Utah State Tax Commission, said state lawyers are studying the questions involved.
“It’s going to be a hassle in the short run,” said Pat Cain, a tax law professor at Santa Clara University in California. She said the patchwork of laws may help speed up consideration of lawsuits challenging those state constitutions.
“Everybody has their opinion on the moral issue,” said Nanette Lee Miller, national leader of the accounting firm Marcum LLP’s practice for lesbian, gay, bisexual and transgender clients. “But everybody has an opinion that nobody should have such craziness on their taxes.”
Beyond tax filing status, states will have to consider other ways in which marriage affects the definition of income.
For example, many companies offer health benefits to the same-sex spouses of their employees. Until the IRS decision, those payments were treated as taxable income.
Now, they won’t appear on the W-2 form that companies submit to the federal government, meaning that states that want to continue taxing that income must tell businesses to keep reporting the income to the state.
Other laws that involve marriage include those governing whether transactions between two people are taxable events.
“Tax accountants are going to be very busy,” said John McGowan, managing director of the LGBT practice at Northern Trust Corp. in Chicago.
Sarah Schmidt, a political and business consultant in Wilmette, Illinois, said she and her wife are reviewing their estate plans and tax filings.
Because she’s part owner of her family’s Wisconsin-based petroleum-distribution business, Schmidt said she files eight or nine state income tax returns a year.
“We’re now going to look at what needs to be changed given this ruling,” said Schmidt, who leads LPAC, a lesbian political action committee. “I’m happy to deal with the added complication.”