Gay Spouses in All States Now Married Under U.S. Tax Law

Gay spouses in all U.S. states will be treated as married under federal tax law even if local authorities don’t recognize their marriages, in what gay-rights advocates are calling a victory.

The decision by the Treasury Department today implements the U.S. Supreme Court’s decision in June to overturn part of the federal Defense of Marriage Act, which had forbidden the Internal Revenue Service from letting married homosexual couples file joint tax returns.

The U.S. government’s decision is a win for same-sex couples who were married in one of the 13 states, the District of Columbia or foreign countries that recognize such relationships and now live in one of the 37 states that don’t.

“This is a very positive development,” said Derek Dorn, a partner at Davis & Harman LLP in Washington and outside counsel to the Human Rights Campaign, which advocates for lesbian and gay Americans. “Additional details need to be worked out in more nuanced areas of the tax law.”

More than 200 provisions in the tax code and federal regulations reference marriage, affecting a range of financial matters such as retirement accounts and health benefits, according to the IRS. Couples with unequal incomes will benefit from the marriage bonuses in the tax code, while those with relatively equal incomes will have to pay more.

The ruling also will make it easier for spouses to inherit money tax-free.

Amending Returns

There are more than 130,000 married, same-sex couples in the U.S., according to estimates from the 2010 Census. For tax year 2013, they must use the married filing jointly or married filing separately status. They have the option to amend returns filed as long as three years ago and can seek refunds; they aren’t required to refile returns if they would pay more.

For example, before the court’s ruling, same-sex spouses who received benefits from one of their employers had to consider the benefits’ value as taxable income for the spouse who doesn’t work for that employer. On an amended return, they could remove that from income and recalculate their tax liability.

The decision may cause complications for states that don’t recognize same-sex marriages and piggyback their tax rules on the federal system.

“There are going to be a lot of state tax attorneys working overtime next week,” said Verenda Smith, deputy director at the Federation of Tax Administrators. “This is what everyone has been waiting for. Now states can release their own guidance.”

State Laws

Same-sex married couples’ finances were complicated by DOMA before the court decision. 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.

Now couples may find the reverse situation in states that don’t recognize their marriages, depending on whether they change their laws now that the IRS has issued its guidance, said Shari Levitan, chairwoman of the New England private wealth services group at Holland & Knight LLP in Boston.

“I have clients who were married in Massachusetts and moved to Arizona,” Levitan said. “They now know they can file their joint return for federal purposes, but they are going to have to unwind all that data according to Arizona’s rules for state tax purposes.”

Estate Taxes

The disconnect may lead to a variety of new questions for gay married couples such as the effect on trusts for the purposes of state estate taxes and the treatment of gains on second homes in some states, Levitan said.

In Arizona, which doesn’t recognize same-sex marriages, the state-tax filing process won’t change, Sean Laux, a spokesman for the Arizona Department of Revenue, said earlier this month. Same-sex couples won’t be allowed to file returns as a married couple, Laux said.

The Treasury Department’s statement doesn’t apply to recognized civil unions or domestic partnerships that aren’t marriages.

“Today’s ruling provides certainty and clear, coherent tax-filing guidance for all legally married same-sex couples nationwide,” Treasury Secretary Jacob J. Lew said in a statement today. “This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”

The IRS also released regulations explaining more detailed rules on amending past returns and is planning further guidance to address special circumstances that apply in a limited number of cases.

Filing Extensions

Same-sex couples had been waiting since June for guidance from the IRS before making decisions on amending past years’ returns or for tax filings due Oct. 15. Some same-sex married couples filed for extensions on their 2012 returns in anticipation of the Supreme Court decision.

Taxpayers who haven’t filed their 2012 taxes can choose to file as two single people or a married couple before Sept. 16. After that, they must file as married, the IRS said.

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.

Also today, benefits began to expand for married gay couples enrolled in Medicare, the U.S. health program for the elderly.

Under current policy, married people enrolled in private Medicare Advantage plans whose spouses live in nursing homes have the right to receive treatment at the same home when they leave a hospital and need follow-up care. Until today, that benefit wasn’t explicitly available to gay married couples.

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