In June, the Supreme Court struck down provisions of the Defense of Marriage Act denying same-sex couples federal recognition of their marital status. Yet for those in same-sex marriages, the tax impact of the Supreme Court ruling remained unclear, as the IRS said it would have to work with the Treasury Department and other government agencies to provide future guidance.
Same-sex spouses got that guidance earlier this week, with Treasury Secretary Jack Lew announcing that the IRS would recognize same-sex marriages for federal tax purposes regardless of their state of residence. Let's take a look at some of the implications of the new IRS policy with an eye toward the elements that same-sex spouses will benefit from the most.
1. Same-sex spouses with unequal incomes are likely to get a marriage bonus.
Federal tax law treats married couples differently from single filers. Although you might think that it would be appropriate for items like tax brackets, standard deductions, and income threshold limits for married couples simply to be double the corresponding amounts for single filers, the actual numbers are a lot more complicated. In general, couples in which one person earns the bulk of the income are most likely to reduce their overall tax burden by getting married, and the IRS ruling will allow same-sex spouses in that situation to do so. With many different factors to consider, including the Earned Income Tax Credit, the Alternative Minimum Tax, and other more specialized deductions and credits, it's hard to make valid generalizations, but many same-sex spouses will benefit from the change in filing status.
2. Same-sex spouses will gain access to benefits available only to married couples.
Married couples also get some special benefits for tax purposes. The issue involved in the Supreme Court case actually involved the deduction for estate taxes that's available to married couples but not to single individuals, whereby same-sex spouses can leave unlimited bequests in their wills to each other without fear of paying estate tax. Similar provisions apply for gifts made during one's lifetime.
Another key provision involves taxation of employer-provided health-insurance benefits. Under prior law, those who were covered under health benefits that their same-sex spouses got from their employers had to include the value of those benefits as taxable income, unlike opposite-sex married couples. The rule change gives same-sex spouses the same exemption as other married couples.
3. Same-sex spouses have the choice, but not the obligation, to amend past-year returns back to 2010.
One particularly helpful aspect of the decision is that same-sex couples who married in past years can amend old returns to reap any benefits of joint-filing status. Most couples will be able to go back three years to amend. But unlike current and future years, in which same-sex spouses will have to treat themselves as married for tax purposes, the IRS gives taxpayers the option to amend past-year returns. Therefore, those same-sex spouses for whom filing as a married couple provides extra benefits will be able to get additional refunds, while those who would pay more don't have to pay the added cost for previous years. That's a win-win scenario for all same-sex spouses.
Winners and losers
As with any tax law change, some taxpayers will benefit from the same-sex marriage decision and others will get hurt financially. What the ruling does, though, is to put same-sex couples in the same position to consider the tax ramifications of marrying that their opposite-sex-couple counterparts have had to deal with all along.