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Just two weeks ago, I discussed potential tax issues a same-sex married couple could face if they live in a state that doesn’t recognize their marriage. Yesterday the IRS ruled that, for tax purposes, such couples are married regardless of where they live. That ruling answers the question of what filing status the couple must use but also complicates tax filing for same-sex couples that live in states that prohibit their marriages.
The IRS based its decision on a 1958 ruling that recognized common law marriages established in states that allowed them, even if a couple subsequently moved to a state that did not recognize such unions. Affected couples could continue to file federal tax returns as a married couple, even though their resident states considered them to be single. Notably, yesterday's ruling also said that the IRS will not consider registered domestic partnerships, civil unions, and other similar formal relationships to be marriages.The ruling renders half of the table in my earlier post irrelevant (see new table) but leaves in place the table’s most complicated cells. A same-sex married couple that lives in a state that doesn’t recognize their marriage will have to file a married federal return and two individual state returns. In many states, the latter will require them to create two fictitious individual federal returns, because such returns are the basis for filing their state returns. Tax preparation software will surely handle the complication seamlessly but affected couples will still have to make decisions about which spouse claims their various deductions and non-wage income. And pity the couples that complete their tax returns the old fashioned way using pencil, paper, and a calculator.
The IRS ruling allows—but does not require—same-sex couples to amend tax returns filed over the past three years, refiling as married couples. Some couples should not refile: they could incur a dreaded marriage penalty, but they may have to fill out a new return to get the bad news. Going forward, they won’t have any choice—they will have to file married returns.
That decision is further complicated for couples in which one spouse has paid taxes on employer-paid health insurance premiums to cover the other spouse. Until now, those premiums counted as earnings and were subject to both income and payroll taxes. Premiums often totaled thousands of dollars each year and resulted in significantly bigger tax bills. The IRS now says that workers can amend tax returns to exclude that fringe benefit (and others) from taxable income. They can also recover any extra payroll taxes they incurred—as can their employers.
The IRS ruling means that, at least for tax purposes, the marital status of same-sex couples won’t change when they move across state lines. But that doesn’t mean that their lives will be any easier when April 15 rolls around.
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