…for all same-sex married couples.
by Grace S. Yung, CFP
In late September of 2013, the IRS and the U.S. Department of the Treasury ruled that legally married same-sex couples will now be treated as married for federal tax purposes—regardless of whether the couple resides in a state that recognizes same-sex marriage.
While this is great news for many, it has also led to some confusion about just exactly what is and isn’t allowed, as well as which tax-filing method can be the most beneficial for both of the partners involved.
What Exactly Does the Ruling Mean?
Under this ruling, same-sex married couples will be considered married for all federal tax purposes. This includes not just income taxes, but federal estate and gift taxes as well.
It also means that same-sex spouses are now included in other areas where marriage is a big factor, such as:
• Personal exemptions
• Dependency exemptions
• Employee benefits
• Receipt of the standard deduction
• IRA (Individual Retirement Account) contributions
• Claiming the child tax credit
• Claiming the earned income tax credit.
Likewise, a same-sex married partner who purchased health insurance coverage on an after-tax basis through their partner’s employer can now treat those insurance premium payments as a pre-tax deduction, and therefore excludable from income. (Going forward, both the IRS and the Treasury Department plan on issuing more streamlined guidelines for employers wishing to file refund claims for payroll taxes on previously taxed health insurance premiums.)
How to Best Proceed with Filing
When filing 2013 income tax returns, legally married same-sex couples should file their 2013 federal income tax return using either the “married filing jointly” or the “married filing separately” tax-filing status.
It is important to note that taxpayers who are married can’t use the “head of household” filing status. However, even if a person is married, he or she could be considered “unmarried” if they have lived apart from their spouse for the last six months of the taxable year and they provide more than half of the cost of maintaining the household that is considered the couple’s principal place of residence for the couple’s children for more than half of the year.
For same-sex married couples who have children and use the “married filing separately” status, there is also a question about which partner should claim the children as dependents. In this case, if the children qualify under section 152(c) with both parents, then either—but not both—of the partners may claim a dependency deduction for the children.
Amending Prior-Year Tax Returns
Although it is not required, same-sex couples who have been legally married for several years are also allowed—but not required—to file an amended income tax return under the newly allowed “married” status for any of the previous years that are still open under the statute of limitations. Filing for a tax refund may also be possible with regard to income, as well as on gift or estate taxes that were paid in the past.
The statute of limitations for filing IRS refund claims is three years from when the tax return was filed, or two years from when the taxes had been paid—whichever is later. This means that same-sex couples can now submit claims for refunds on taxes they paid as single individuals for the years of 2010, 2011, and 2012.
Basically, an amended tax return requires the filing of a new Form 1040, along with a Form 1040-X showing the changes between the tax filer’s original tax return and the corrected one. In most instances, people file an amended return for the purpose of making a correction to their original tax return. However, in the case of married same-sex spouses, the amended returns would instead be filed in order to correct one’s tax-filing status. This change in status will mean that corrections must also be made to income and/or tax deductions in order to recalculate tax liability or the amount of a tax refund. Should the couple decide to file a “married filing jointly” amended return, they would also essentially be combining both of their previous single returns into just one jointly filed tax return.
Taking the Next Step
Tax issues require a great deal of special attention for same-sex couples, and this article is not intended to be tax or legal advice for any individual. In order to ensure the best outcome, it is best to have an accountant or CPA, as well as a financial planning professional, working together on your behalf.
Given the many recent changes in U.S. tax law, it is essential to work with professionals who are not only up-to-date on new regulations, but also have in-depth experience working with those in the LGBT community.
Grace S. Yung, CFP, is a certified inancial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.