taxes

Same tax issues now for same-sex couples

Taxes » Tax Filing » Tax Issues Of Same-Sex Marriage

Gay and lesbian couples got relationship equality with the June 26 U.S. Supreme Court ruling that the Defense of Marriage Act, or DOMA, is unconstitutional. Now that the law has been struck down, same-sex marriage is legal in the eyes of the federal government.

Jurisdictions that recognize same-sex marriages

  • California
  • Connecticut
  • Delaware
  • District of Columbia*
  • Iowa
  • Maine*
  • Maryland
  • Massachusetts
  • Minnesota
  • New Hampshire
  • New York
  • Rhode Island
  • Vermont
  • Washington*

*These jurisdictions also allow domestic partnerships.

That means that same-sex married couples can, among other tax matters, now file joint tax returns. But as is often the case with taxes, such equality may work in their favor. Or it could make things worse.

"From the perspective of tax equality, no one wants to pay more in taxes," says CPA Nanette Lee Miller, partner in the San Francisco-based accounting firm Marcum LLP." But with tax equality, everyone would be subject to the same rules."

Thirteen states and Washington, D.C., recognize the marriage of same-sex couples. California is now added to that list, after the high court's dismissal of a separate same-sex marriage case, which was heard in March, the day before the DOMA arguments.

On the federal level, however, DOMA had defined marriage as a legal union between one man and one woman. And that made a big difference in how some tax laws had been applied. Now, for better or worse, they will be applied more equitably.

That was made official Aug. 29, when the Treasury Department and Internal Revenue Service announced that same-sex married couples, regardless of where they live, will be recognized as married for federal tax purposes. As long as the couple was legally married in a jurisdiction that sanctions the weddings, they are married in Uncle Sam's tax eyes even if they later move to a state that does not recognize same-sex marriages.

Filing a federal return

Before the high court's 5-4 decision, a legally married same-sex couple could not file a federal married-filing-jointly 1040 tax return or even a married-filing-separately 1040 tax return.

These couples had to file two returns, with each partner sending the IRS a Form 1040 as a single taxpayer or, if children are part of the family, with one designated partner filing as a head-of-household taxpayer.

Because the 10 percent and 15 percent federal income tax brackets for married joint filers are double that of single taxpayers, the filing differences don't make that much difference to taxpayers whose total income falls in these lower brackets. This relatively recent change to tax law was made to ease the marriage tax penalty, which occurs when a couple filing jointly pays more than they would if the spouses each filed returns as single taxpayers.

Tax impact on $100,000 salary for different married couples

 Tax due for heterosexual married couple filing jointlyTax due for same-sex married couple filing separate single returnsDifference
100% income earned by one spouse$11,858$19,585$7,727
90% income earned by one spouse/10% by the other$11,858$17,294$5,436
80%/20% income split$11,858$16,043$4,185
70%/30% income split$11,858$13,483$1,625
60%/40% income split$11,858$12,483$625
50%/50% income split$11,858$11,858$0

Assumptions: household income of $100,000; couples take the standard deduction; 2013 tax rates; no children and no tax credits. Source: H&R Block.

But once the income levels increase, the filing-status options and their tax effects are more pronounced. And when couples earn vastly different incomes, joint filing in some cases produces a combined income that receives better tax treatment. Same-sex couples, however, didn't get to take advantage of this joint-filing benefit.

Before the DOMA ruling, "If one partner makes more, there (was) no benefit of graduated tax rates," says Miller. "There (was) no averaging of income where a couple would typically pay a lower tax rate if one makes substantially more than the other partner because the lower earnings of one spouse would pull the higher-earning partner's income down."

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