For the first time in U.S. history, same-sex married couples may file as “married” on their 2013 federal returns. No longer are same-sex married couples seen as “legal strangers” in the eyes of the I.R.S. Although it may feel strange to be excited about federal income taxes, there are many impactful and important aspects of the I.R.S. rulings that can benefit same-sex couples.
It is important for same-sex married couples and their financial advisors to fully understand the wide-ranging changes in their financial status as a result of the I.R.S. ruling. Tax professionals who are up to date on these changes can help couples navigate these new complexities effecting federal and state income taxes, inheritances and estate taxes, business income allocations, retirement benefits, expenses for children, educational costs and more.
The I.R.S. ruling, although enormous in its impact for same-sex married couples, does not cover all federal programs and agencies yet. For example, the legislation that created Social Security defines marriage by “place of domicile,” meaning that in Michigan same-sex marriages would not be recognized by Social Security because same sex marriage is not legal in Michigan. Married couples living in any of the 17 states and the District of Columbia where marriage is legal would be able to apply for spousal Social Security benefits. Although President Obama has instructed all federal agencies to go through their rules and regulations and wherever possible interpret or change them to be inclusive of same-sex marriages, it may be years before every federal program has inclusive rules and regulations.
Here is a quick Q&A on just some of the most frequently asked questions about the new I.R.S. ruling and its impact on same-sex married couples filing jointly for the first time:
Q. Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?
A. Yes. For tax year 2013 and after, same-sex spouses generally can file using a married filing separately or jointly filing status.
Q. Can we go back and amend prior year’s tax returns?
A. For tax returns for years before 2013 same sex spouses may choose to amend their federal tax returns to file using married filing separately or jointly filing status, provided the statue of limitations for amending has not expired (generally three years from the date the return was filed or two years from the date the tax was paid, whichever is later).
Q. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?
A. No. A taxpayer’s spouse cannot be a dependent.
Q. Does the I.R.S. recognize domestic partnerships?
A. No. For the purposes of federal income tax filings, only couples who are legally married may file jointly.
Q. Can same-sex spouses file jointly on their Michigan tax return?
A. No. Michigan does not recognize same-sex marriages for any purpose. Couples filing federal joint returns must go back and recalculate their taxes separately for their state tax returns. This recalculating may require significant additional work for tax preparers.
Q. Can a same-sex spouse file using head-of-household filing status?
A. A married taxpayer cannot file using head of household filing status. However, a married taxpayer may be “considered unmarried” and may use head-of-household filing status if the taxpayer lives apart from the spouse for the last six months of the year and provides more than half the cost of maintaining a household that is the principal place of abode of the taxpayer’s dependent child. (IRS Pub. 501)
Q. If the taxpayer adopts the child of their spouse as a second parent or co-parent, may the adopting parent claim the adoption credit for qualifying adoption expenses paid or incurred to adopt the child?
A. No. An adopting parent may not claim an adoption credit. (Second parent adoptions in Michigan are rare due to a hostile . However, a favorable decision in the DeBoer v Snyder federal case going to trial Feb. 25 in Detroit may allow same-sex couples to more easily adopt each other’s child(ren)).
Q. Must same-sex married couples continue to pay taxes on the health premiums and other benefits for their spouse by having those expenses added to their taxable income?
A. No. As a result of the I.R.S. ruling, an employee enrolling a same-sex spouse for benefit coverage under an employer-sponsored health plan no longer has imputed income for federal income tax purposes; may pay for the spouse’s coverage using pre-tax contributions under cafeteria plans; and may take tax-free reimbursements from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and health savings accounts (HSAs) to pay for the same-sex spouse’s qualifying medical expenses.
Q. If a sole proprietor employs same-sex spouse in his or her business, can the proprietor get a refund of Social Security, Medicare and FUTA taxes on the wages paid to a spouse as an employee in the business?
A. Services performed by an employee in the employ of his or her spouse are excluded form the definition of employment for the purposes of FUTA. For all open tax years, a sole proprietor can claim a refund of FUTA tax paid on compensation the sole proprietor paid the spouse as an employee in the business. Services of a spouse are excluded from Social Security and Medicare taxes only if the services are not in the course of the employer’s trade of business, or if it is domestic service in a private home of the employer.
Q. Even though Michigan does not recognize same-sex marriage, will same-sex spouses be considered spouses for a qualified retirement plan?
A. Yes. A plan operating only in a state that does not recognize same-sex marriages must treat a participant who is married to a same-sex spouse under the laws of a different jurisdiction as married for the purposes of applying the qualification requirements that relate to spouses. A qualified defined contribution plan provides that participant’s account must be paid to participant’s spouse upon death unless spouse consents to a different beneficiary.
For more information consult a professional or go to http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples