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Tax issues of same-sex marriage

Of course, it could work the other way.

If DOMA is invalidated, some jointly filing same-sex married couples could face the same higher tax problem as their heterosexual counterparts. The marriage tax penalty tends to kick in when both partners earn roughly the same amount, especially if both are in the higher tax brackets.

In anticipation of the ruling, Miller advises her clients to run the numbers to determine whether they will pay more or less in taxes if DOMA is repealed.

If the court does render the law unconstitutional, CPA John J. Masselli says same-sex married couples should immediately amend any open tax years (generally those filed within the past three years) to file as married filing jointly for federal purposes.

"Of course, I would only recommend this strategy if the outcome will result in a more beneficial tax outcome," says Masselli, who also is a tax professor in the Texas Tech University Rawls College of Business.

More work required

In addition to the taxes themselves, issues of same-sex marriage include the necessity for couples to do more work at tax time. And that usually translates to increased fees for tax preparation and advice.

When a same-sex couple lives in a state that has an income tax and that recognizes their marriage, they can file jointly in that state. This also is true if they are in states that recognize civil unions and registered domestic partnerships the same as marriages for tax purposes.

States with civil unions

States with only domestic partnerships

Same-sex couples in civil unions are granted state-level spousal rights.

  • Colorado
  • Delaware*
  • Hawaii**
  • Illinois
  • New Jersey
  • Rhode Island*

Unmarried couples in domestic partnerships, including same-sex, are granted some or nearly all state-level spousal rights.

  • California
  • Nevada
  • Wisconsin
  • Oregon

*Civil unions will no longer be available in Delaware and Rhode Island when those states' same-sex marriage laws take effect. A civil union is a legal status created by several states and which provides legal protection to same-sex couples in the applicable states only. Civil unions typically are not recognized outside the couples' state of legal residency.

**Hawaii also allows domestic partnerships. A domestic partnership is a state-sanctioned legal status that allows unmarried couples, heterosexual and same-sex, to formalize their relationships and which extends some state rights to those couples.

One problem with taxes is, however, that most states use taxpayers' federal returns as the basis for filing a state return.

In order to have the correct numbers from a federal return to plug into a joint state return, same-sex couples must fill out a federal return. So same-sex couples typically complete a dummy federal joint return to use as the basis for their state taxes.

That means four returns: one joint state filing, a fake federal joint return and two single federal 1040s for each partner. If the couple uses a tax professional, that extra tax work means additional costs for the taxpayers.

The costs can go beyond just filing season.

"Most heterosexual married couples feel protected by tax laws," says Miller. "But because of DOMA, same-sex couples have to be proactive." That means more planning and more professional fees in addition to the added tax considerations.

If, for example, you cover your domestic partner on workplace health insurance, it's a taxable event to the partner who provides the coverage. That's an expense that heterosexual couples don't face, since the spouse in a man-and-wife marriage is part of the federally tax-free family coverage.

"That's typically between $3,000 to $5,000 a year," says Miller. "Some employers will gross it up to cover the tax, but others won't, so you have to be prepared for the expense."

Companies that "gross up" employee compensation build the tax cost of the added income into the payment so that when taxes are accounted for, the worker still nets the full amount of the intended bonus or benefit.

But if a workplace doesn't add the extra money to cover taxes, that's one more cost and added tax planning for same-sex husbands and wives whose marriages aren't recognized by Uncle Sam.

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