Same tax issues now for same-sex couples

Of course, it could work the other way.

Now that 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.

Before the Supreme Court changed the law, Miller advised her clients to run the numbers to determine whether they would pay more or less in taxes if DOMA was repealed.

Now that same-sex couples will face the same federal filing status decisions as their heterosexual counterparts, they may need to run the numbers to see if it is more tax-advantageous to file jointly or as married filing separately.

Since the court has deemed 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.

Tax workload, costs reduced

When DOMA was in effect, the federal law meant that same-sex couples had to do more work at tax time. And that usually translated to increased fees for tax preparation and advice.

For a same-sex couple living 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
  • Hawaii*
  • Illinois
  • New Jersey

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

  • Nevada
  • Wisconsin
  • Oregon

*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.

The IRS' decision Aug. 29 to extend same-sex marriages the same federal tax-filing status treatment as heterosexual marriages regardless of where the couples live does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

But because the Internal Revenue Service did not recognize that joint state filing, they had to do added work to complete their state returns. This was because 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 had to fill out a fake federal Form 1040. That dummy federal joint return was used as the basis for their state taxes.

That meant 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 meant additional costs for the taxpayers.

The costs also went beyond just filing season.

"Most heterosexual married couples feel protected by tax laws," says Miller. But DOMA forced same-sex couples to be proactive. And that meant more planning and more professional fees in addition to the added tax considerations.

Before DOMA was invalidated, for example, when an employee covered a same-sex spouse on workplace health insurance, it was a taxable event to the partner who provided 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 didn't add the extra money to cover taxes, that was one more cost and added tax planning for same-sex husbands and wives whose marriages weren't recognized by Uncle Sam.

Now, however, that's one tax matter that newly federally recognized same-sex couples don't have to worry about.


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