Same-sex couples legally married in states that recognize same-sex marriages will now be treated as married for federal tax purposes. In a recent IRS revenue ruling, the IRS now interprets the terms “spouse”, “husband and wife”, “husband”, and “wife” to include same-sex couples married in jurisdictions that legally recognize same-sex marriages. This is a 180 degree turn from prior interpretations of these terms in prior rulings. In fact the ruling is in direct response to the U.S. Supreme Court’s ruling in United States v. Windsor in which the Supreme Court held that the Defense of Marriage Act’s (DOMA) definition of marriage being between a man and a woman was unconstitutional, violating equal protection principles.
So what does this ruling affect?
1. Income Taxes
This ruling will most dramatically affect income taxes for married same-sex couples. Same-sex married couples can now file tax returns jointly or “married but filing separately”. Among other benefits, they can claim the same personal and dependency exemptions, take standard deductions, and claim the earned income tax credit or child tax credit.
Employees that pay for same-sex health insurance coverage provided by their employer can treat the amounts paid as pre-tax dollars and excludable from income. Cafeteria plans, qualified retirement plans and other employment related tax-favored arrangements are also affected by this ruling.
2. Estate and Gift Taxes
Additionally, the ruling affects federal estate taxes and gift taxes. The annual gift tax exclusion for married couples is $28,000.00 in 2013 versus only $14,000.00 for individuals. Consequently same-sex married couples can gift up to $28,000.00 to an individual without having to file a gift tax return or pay a gift tax.
For estate tax purposes, the same rules that apply to married couples will apply, meaning that same-sex couples may be able to insulate over $10.0 million of their estate from federal estate taxes. (See Estate Planning and the Fiscal Cliff). When the first spouse passes away the surviving spouse can claim the unlimited marital deduction, meaning that after the first spouse’s death, the surviving spouse will not pay any federal estate taxes if the first spouse’s estate exceeds the annual exclusion in effect in the year that the spouse passes away ($5.25 million in 2013). The surviving spouse can also utilize portability and other tax savings tools that are available to married couples.
3. Domestic Partnerships/Civil Unions
The ruling specifically states that it does not apply to domestic partnerships, civil unions or similarly defined relationships.
4. Applies to All Legally Recognized Marriages
The ruling applies to all legally recognized marriages regardless of where the couple actually resides. Consequently, an Oregon couple that is legally wed in Washington is “married” under federal tax laws. However, under Oregon’s tax laws, the couple would not be considered “married” since Oregon does not recognize same-sex marriages. The couple will still need to register as domestic partners in Oregon to receive the same state law rights afforded to married couples.
5. Ruling is Retroactive
The ruling is retroactive. Therefore, married same-sex couples that filed income, gift or estate tax returns in 2010, 2011 and 2012 may be able to claim a refund from the IRS. For any years in which a return was not filed by either spouse and they were legally married, the couple will be able to file a joint return for those years.
The IRS has provided a FAQ which will most likely be updated as more questions roll in.