MARCH 10, 2014 VOLUME 21 NUMBER 10
Income tax filing season is upon us, and so it’s an appropriate time to turn our attention to what’s new (or little-known) in the income tax world. We’re particularly interested, of course, in income tax issues that affect our clients, who usually are more interested in estate and gift taxes than income taxes. But there’s one subset of our clientele that really does need to focus on new income tax rules: same-sex married couples.
What’s new this year, of course, is that the U.S. Supreme Court has struck down a key part of the federal Defense of Marriage Act (DOMA). That federal law had said that even if a state chose to recognize same-sex marriages, the federal government would not accept that state recognition. After the Supreme Court ruling in United States v. Windsor on June 26, 2013, that principle was reversed. Later interpretations by the Internal Revenue Service (along with other agencies of the government) have expanded that reversal.
In the wake of the Windsor decision, the executive branch of the federal government has adopted a new approach to determining the validity and effect of same-sex marriages. The short version: if the marriage was recognized as valid where and when it was solemnized, it will be valid for federal (including income tax) purposes. That has been referred to as the “place of celebration” rule. It is sometimes called the “state of celebration” rule, but it is not limited to states — a marriage valid in a foreign country will work, too. Like, for one example, that of Edith Windsor and Thea Spyer, who were married in Ontario, Canada, in 2007, but lived in New York.
We still see a lot of confusion about the effect of the new IRS rules, though. Our gay and lesbian clients often believe that they are not married because Arizona does not (yet) recognize the validity of their marriage. Sometimes same-sex couples were married years ago and have since drifted apart — believing, perhaps, that they did not need to do anything to end a marriage that their home state stubbornly refuses to acknowledge. The new rules will require a rethinking of those relationships.
Here’s the bottom line for same-sex married couples: if you were legally married in another state or country, you need to file your federal income taxes this year (and for future years) as if you were married — because you are. That may mean that some couples actually pay more in total income tax — the well-known “marriage penalty” in the federal tax code will now apply to same-sex couples in the same way that it has long applied to opposite-sex couples. But it is not optional — a married couple, regardless of gender, can not decide to simply file as two single individuals regardless of what Arizona thinks of the validity of their marriage.
Does that mean that married couples who are no longer together need to file a joint income tax return? Yes — or they have to file as “married, filing separately.” Does that mean separated — but still married — couples have to communicate with each other, and share financial information? No, but if they file separately they are likely to pay more total tax, and it makes sense to talk through the options with a qualified income tax preparer.
Arizona also has a state income tax, of course, and it still refuses to recognize those same sex marriages. Since your state income tax filing starts with your federal tax return, a “married filing jointly” federal return is bound to confuse the state tax folks. So they have come up with their own form to make adjustments: it is called Arizona Schedule S and it is available on the Arizona Department of Revenue website. There are instructions for the Schedule S, and a version for 2012 taxes as well as 2013. (It could be worse: some states are requiring same-sex couples to prepare a federal return as if they were unmarried, just to attach it to their state tax return.)
Why is there a 2012 version of Arizona’s Schedule S? That leads to another point worth considering: if you were married before 2013, you may be eligible to (but you are not required to) amend your federal income tax return to file as a married couple. If you do, you will need to amend your Arizona tax return as well. You clearly have the right to amend your 2012 return, and you may be eligible to amend for 2011 as well — but note that if you amend for 2011 you will also need to amend for 2012 at the same time. Amendment rules are confusing, but the IRS has attempted to make them understandable on their generally excellent website.
There are other tax-related issues concerning same-sex marriages, and more opportunities for federal and state tax law to diverge.One we saw in our office this month: a surviving partner visited with us after the death of her long-time partner. She never mentioned that they had been married, thinking (as she later told us) that the marriage was not valid in Arizona. But when it came time to look at her partner’s Individual Retirement Account (IRA), it made a difference — even in Arizona. As a surviving spouse she had the ability to simply roll over her spouse’s IRA and continue to defer withdrawals until she reaches 70 1/2. If they had not been married she would have been required to begin withdrawals immediately, and faster. The lesson: don’t assume that Arizona’s failure to recognize your marriage means that it has no effect.
Most of the other changes, however, are considerably more arcane; the requirement that same-sex married couples file their federal returns as married (whether separately or jointly) is not arcane, and will have a big impact on those pioneers who got married in another state or country. Ask for advice, and share your marital status with your lawyer and your tax preparer.