By NANCY ORTMEYER KUHN
Tax season is here and now that multiple states recognize same-sex marriage, tax filing season has become a bit more complicated.
Due to passage in 1996 of the Defense of Marriage Act, the federal government does not recognize the newer state laws regarding same-sex marriages or civil unions. Only marriages between a man and a woman are recognized under federal law. This means that a same-sex couple is prohibited from filing as “Married Filing Joint” or “Married Filing Separate” on their federal tax returns.
The IRS makes this exceedingly clear in the Form 1040 instructions which state: “For federal tax purposes, a marriage means only a legal union between a man and a woman as husband and wife and the word ‘spouse’ means a person of the opposite sex who is a husband or a wife.” Thus, a same-sex married couple must file separate federal tax returns using the filing status of “Single” or “Head of Household” if there is a qualifying dependent. The question is whether, under state law, the state tax burden can be lightened if a different filing status is used.
In the District of Columbia, same-sex married couples may file jointly, separately but on the same return, or single. Unmarried domestic partners must be registered with the Vital Record Division of the D.C. Department of Health, in order to have tax filing (and other) options. Domestic partners also have the choice of filing jointly, separately on the same return, or single.
Depending on circumstances, head of household may also be an option for one or both partners if there is a qualifying child or other qualifying individual. If the couple has no dependents, the standard deduction for a joint return is $7,350 while each single filer has a standard deduction of $5,675. Unless there are other adjustments, it is usually better for each to take the $5,675 deduction and file as singles. If the couple has itemized deductions, then it may be more beneficial to file jointly. Or, if one spouse has a high income and one a low income, it may be better for the high income spouse to file as single and claim the itemized deductions and the lower income spouse to file as single and take the standard deduction, assuming the itemized deductions are actually paid by the higher income spouse.
This is not possible for male/female married couples, federal or state, and so an advantage can be gained over the options available to heterosexual married couples. Generally, a “mock” federal return will need to be completed with married filing joint as the status, in order to determine if filing jointly will be beneficial. As with all taxpayers, each single-sex couple’s individual circumstances will dictate which tax filing option is best, and professionals should be consulted in more complex situations.
If filing in New York, same-sex married couples are required to file using a married filing joint status, starting in 2011. The instructions are explicit that after filing federal taxes as “single,” the federal form 1040, including all attachments, must be recomputed using a married filing joint status, and then the couple must apply those revised numbers to the New York state return.
The IRS recently issued guidance in Publication 555, which includes general information for taxpayers who are registered domestic partners/same-sex spouses living in community property states. In general, the income of both spouses must be combined and each spouse reports half of the combined community income earned by the couple. Community property states that recognize same-sex marriages currently include California, Nevada and Washington state.
The gift tax return is another tax burden to be avoided. Heterosexual couples can freely transfer money and gifts to each other without incurring any gift tax. However under federal law same-sex married couples are limited to giving gifts totaling no more than $13,000 each year to each other, or a gift tax return will need to be filed by the gifter and the amount will be counted against the individual’s lifetime exemption. Therefore, any joint expenses should be paid through a joint account, with careful records kept to avoid recharacterization of joint expenses as gifts.
Whether filing jointly or separately, it is wise to keep precise records and to run the numbers in various scenarios with your tax advisor to ensure you are choosing the filing status that will result in the lowest tax burden.
Nancy Ortmeyer is with Jackson & Campbell.