The legal same-sex marriages of gay couples — whether or not they reside in a state that observes their union — will now be recognized for tax purposes in the wake of the Supreme Court decision against the Defense of Marriage Act.
Treasury Secretary Jacob Lew announced the change on Thursday in a joint statement with the Internal Revenue Service.
“Today’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide,” Lew said. “It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve. This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”
The decision, which brings the Obama administration into compliance with the ruling against DOMA, means gay married couples will be able to file federal taxes jointly each year. The announcement also means married gay couples be treated the same as opposite-sex married couples for income and gift and estate taxes.
These couples, according to the joint statement, will now be treated equally in terms of claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.
LGBT advocates applauded the Obama administration for instituting the change, which they said would help bring relief to married gay couples throughout the country.
Evan Wolfson, president of Freedom to Marry, said the announcement makes today “a day of celebration and relief for married same-sex couples all over America.”
“At long last, the IRS will treat them as what they are: married,” Wolfson said. “Freedom to Marry commends the administration’s swift implementation of the Supreme Court’s landmark ruling for federal equality in an area that will have a direct, tangible impact on families’ financial health.”
Chad Griffin, president of the Human Rights Campaign, also praised the Obama administration for implementing the change.
“With today’s ruling, committed and loving gay and lesbian married couples will now be treated equally under our nation’s federal tax laws, regardless of what state they call home,” Griffin said. “These families finally have access to crucial tax benefits and protections previously denied to them under the discriminatory Defense of Marriage Act.”
The issue of unequal federal taxation for gay married couples was the reason why the Supreme Court struck down Section 3 of DOMA. Plaintiff Edith Windsor, a New York lesbian, sued the U.S. government because she had to pay $363,000 in estate taxes upon the death of her spouse, Thea Spyer.
According to the statement, the federal government will now recognize for tax purposes any legal same-sex marriage — even if the couples resides in a state that doesn’t observe the union. However, the new policy doesn’t apply to domestic partnership or civil unions.
Troy Stevenson, executive director of the New Jersey-based Garden State Equality, said the decisions demonstrates why his state needs to enact marriage equality. New Jersey offers civil unions, but not same-sex marriage.
“While this is great news for couples who have been married in the 13 states that recognize full marriage equality; let us be clear, New Jerseyans should not be required to cross state lines to be afforded the dignity of marriage,” Stevenson said. “This decision by the IRS makes it crystal clear that civil unions are not now, and never will be equal to marriage.”
Additionally, gay couples may file an amended return if they feel they would’ve receive a refund in one or more prior tax years still open under the statute of limitations. That means these couples generally can file a refund claim for up to three years in the past: 2010, 2011, and 2012. Under some circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, they may be able to seek a refund from an earlier time.
Further, gay employees who receive same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.
Pending legislation in the Senate that would have eliminated the federal tax on employer-provided health insurance for same-sex couples is known as the Tax Parity for Health Plan Beneficiaries Act.
Sen. Charles Schumer (D-N.Y.), the sponsor of the bill, said in a statement to the Washington Blade he welcomes the new policy from the administration, but still seeks passage of his bill cover individuals in civil unions or domestic partnerships.
“Today’s ruling is an important part of implementing the Supreme Court’s historic decision to overturn DOMA,” Schumer said. “I still strongly believe that couples in civil unions and domestic partnerships should receive the same tax treatment as all married couples and will continue to push for exactly that.”
Senior Treasury officials lay out new policy
In a conference call with reporters, senior Treasury officials, speaking on condition of anonymity, laid out the reasoning by which the administration determined that married gay couples living in non-marriage equality states would be recognized for federal tax purposes.
“We have a federal tax code that applies to all 50 states,” officials said. “The thought process was that from tax administration standpoint, it made sense to have rules to apply across the entire nation. So, same-sex couples that are married under federal law in one state should get similar treatment regardless of where they live. On the flip side, from the administration’s standpoint, it would be very difficult to administer a situation it was dependent on where a taxpayer lived on what the state was in that time.”
Officials said the reasoning was analogous to the administration’s previous determination that common law marriages, or some kind of irregular marriage, would be recognized as a union for federal tax purposes.
It’s possible that under some circumstances, married gay couples will have to pay more in taxes than they were paying with DOMA in place. Officials didn’t have an exact number for how many gay couples would pay more in taxes, but expected it would be proportionate to the number of straight couples.
While gay couples may file an amended tax return for up to three years in the past, officials said there’s no obligation to do so — even if they should have had to pay more in taxes under the new policy.
“It’s basically the taxpayers option to that, to go back and file an amended return,” officials said. “There are instances in which a taxpayer would find it advantageous to file an amended return claiming a joint filing status for a previous tax year, but it’s not a requirement.”
In the event that an employer offers domestic partner health benefits to gay employees, but doesn’t recognize same-sex marriage, officials said federal tax immunity would also apply to these benefits. That would be a situation to similar to Walmart, which is set next year to offer domestic partner health benefits to gay employees in same-sex relationships, but won’t recognize same-sex marriages.