Same-Sex Spouses Treated as Married for Federal Tax Purposes

By Michelle E. Botwinick, C.P.A.
In June 2013, the Supreme Court struck down the provision of the Defense of Marriage Act (DOMA) that treated same-sex spouses as unmarried under federal law. Following up on the Supreme Court’s decision in U.S. v. Windsor, the IRS has ruled that same-sex spouses who were legally married in a jurisdiction that permits same-sex marriage will be treated as married for federal tax purposes, even if they now live in a jurisdiction that doesn’t recognize same-sex marriages. The jurisdiction may be domestic or foreign.
The tax consequences of this change are significant, since almost 200 provisions of the Internal Revenue Code treat marital status as a factor for receiving a benefit or being subject to a limitation. The following are some of the most important tax consequences:
Filing status. Starting with the 2013 tax year, same-sex spouses must file their taxes as married spouses, either jointly (married filing jointly) or separately (married filing separately). Joint filing is generally more advantageous, since filing as married filing separately usually results in higher tax liability. Like opposite-sex spouses, same-sex spouses generally can’t file as head of household unless they meet certain requirements.
Deductions. Same-sex spouses filing jointly must choose to either itemize deductions or take the standard deduction. Itemized deductions are subject to an overall limitation if the adjusted gross income (AGI) of an individual exceeds an applicable amount. Since filing as married may result in increased combined income, itemized deductions may be reduced as a result of the overall limitation. Same-sex spouses can now take certain deductions for expenses incurred for their spouse. For example, same-sex spouses can deduct payments made for their spouses’ medical expenses.
Tax credits. Many tax credits are structured so that the amount of the credit is gradually phased out when income reaches a certain threshold. Since filing as married may result in increased combined income, a credit amount may be reduced or eliminated completely, resulting in a greater tax liability. Examples of credits that are subject to income limitations are: the earned income tax credit, the child and dependent care credit, the child tax credit, the education tax credits, and the adoption credit. In addition, a same-sex spouse can’t claim the adoption credit for expenses incurred in adopting his or her spouse’s child (this rule is also in place for opposite-sex married couples).
Health benefits. A same-sex spouse employee who is covered by an employer-sponsored health insurance plan can now exclude from gross income the amount of the premium paid by the employer for coverage of his or her same-sex spouse. Before the Supreme Court’s decision, if a plan covered the non-employee spouse, the employee spouse was taxed on the estimated value of the coverage. Further, an employee spouse can now pay health coverage premiums for his or her same-sex spouse on a pre-tax basis under an employer-sponsored cafeteria plan. Additionally, a same-sex spouse non-employee can now obtain continuation of health coverage under COBRA, if the same-sex spouse employee’s coverage ends due to a qualifying event such as termination of employment.
A less favorable consequence of the decision is that same-sex spouses will now be subject to a combined contribution limit for certain health savings accounts or flexible spending accounts that used to apply to each spouse on an individual basis. For example, before the decision, each same-sex spouse could individually contribute the maximum contribution amount to a dependent care flexible spending account. After the decision, the maximum contribution amount applies to the same-sex spouses together.
Retirement plans. Same-sex spouses now have the rights of married spouses with respect to retirement plans. This is the case even for a qualified retirement plan maintained by an employer that operates in a state that doesn’t recognize same-sex marriage. Thus, spousal consent must be obtained before certain actions can be taken with respect to a retirement account, such as changing the plan beneficiary to a non-spousal beneficiary. In case of divorce, a qualified domestic relations order can be obtained that gives one spouse the right to share the pension benefits of the other. After a spouse’s death, the surviving spouse can stretch out distributions from a qualified retirement plan or individual retirement account under more favorable rules than apply to non-spousal beneficiaries.
Estate and gift taxes. There are a number of favorable estate and gift tax provisions available to married couples that are now available to same-sex spouses. For example, either spouse can utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax. The spouses can also “split” their gifts, meaning that gifts to others are treated as if made one-half by each spouse. Further, the estate of the first spouse to die gets a marital deduction for amounts transferred to the surviving spouse and can transfer the deceased spouse’s unused exclusion amount to the surviving spouse.
For 2012 and earlier years, same-sex spouses who file an original return on or after September 16, 2013, generally must file as married. For returns filed before September 16, 2013, if the statute of limitations is still open, same-sex spouses may, but aren’t required to, amend their returns to file as married. The statute of limitations generally expires three years from the date the return was filed, or two years from the date the tax was paid, whichever is later. For tax returns filed before September 16, 2013, same-sex spouses should consider filing amended tax returns for open tax years if filing as married would decrease their tax liability.
Same-sex spouses should also consider filing amended estate tax and gift tax returns to claim the tax benefits discussed above, as well as reviewing and amending their estate plans. Same-sex spouse employees who paid employment taxes (social security and Medicare) on gross income attributable to health coverage for their same-sex spouses should consider seeking an adjustment or reimbursement from their employer.
It’s important to note that although same-sex spouses can now file jointly for federal tax purposes, they will still need to file as single for Georgia income tax purposes.