Same-sex married couples and state taxes
Sept. 16 was a watershed tax day for some same-sex married couples. From that day forward, they must file as married -- jointly or separately.That means their added filing tasks come to an end when it comes to completing both federal and state tax returns.
Other gay and lesbian couples, however, are finding that their tax-time double duty has simply shifted to state paperwork. All the shuffling of state and federal 1040 forms is thanks to the Supreme Court's June 26 decision that invalidated the part of the Defense of Marriage Act, or DOMA, that defined marriage as between one man and one woman.
The good news for gay and lesbian couples continued in late August, when the Internal Revenue Service announced that it would implement a "state of celebration" standard when it comes to federal return filing.
State of celebration refers to the jurisdiction in which the couple was married, meaning the same-sex pair can file their federal taxes as married even if they live in a state that does not recognize their marriage.
"Traditionally, the IRS has not used state of celebration, but the state of domicile for its rulings," says Kyle D. Young, CFP professional and Accredited Domestic Partnership Advisor at the Schmitt-Young Investment Group of Wells Fargo Advisors. "It is a huge win for married couples."
Under the celebration instead of residency standard, a couple in Texas, which does not recognize same-sex marriages, could head to California, exchange vows and return home to the Lone Star State. They then would file a joint federal tax return and not have to worry about state taxes, since Texas is one of seven states without an income tax on wages.
But many same-sex married couples who live in states that do collect income taxes will have some filing work ahead.
Still twice the tax work for some
The IRS decision does eliminate a common complaint of same-sex married couples who live in states with income taxes. Because most states rely on some portion of taxpayers' federal return information, same-sex married filers who had been able to file a joint state tax return previously had to complete a mock federal joint Form 1040 to use as their state basis.
Now that federal return effort won't be wasted. The 1040 they fill out as a married couple will actually go to the IRS for processing.
State and federal tax return conformity, 2013 tax year filing
|Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming|
|New Hampshire, Tennessee|
|Illinois, Indiana, Michigan, Utah|
|North Dakota, Vermont|
|Minnesota, North Carolina, South Carolina
Note: Beginning with the 2014 tax year, North Carolina will join the group that starts the state tax return with federal adjusted gross income and then applies one rate.
|Arizona, California, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, Virginia, West Virginia, Wisconsin|
|Massachusetts, District of Columbia|
|Alabama, Arkansas, Mississippi, New Jersey, Pennsylvania|
Source: Tax Foundation.
1 federal, 2 state returns
But while same-sex couples are celebrating in states that recognize they're married and which collect state taxes, those in other states, along with state tax officials and tax professionals, are left scratching their heads.
Will states that don't recognize same-sex marriage still follow the IRS and accept joint tax returns from the couples?
That was the advice Kathryn M. Morgan, an enrolled agent and master tax adviser for H&R Block in Shreveport, La., got from Louisiana tax officials. "Through unofficial email and conversations with the Department of Revenue, I've been told to file the state material like the federal ones," says Morgan.
But she's approaching the situation from a trust-but-verify perspective. Morgan and other tax professionals nationwide await promised additional word from the IRS as well as formal guidance from their state tax offices.
"Everybody is in limbo," says Morgan. "We are still waiting on responses from the IRS and the states as the clock ticks ever closer. I have advised my clients to let me work up the numbers, file the returns, including the state jointly, if they work in their favor and then wait for a ruling. Or to let me file a protective claim for the state for 2009 and unfiled 2012 returns so they don't lose their rights to those refunds." By a protective claim, Morgan means filing a claim for a refund while a tax issue is evolving. This preserves the taxpayer's right to claim a refund when the matter is resolved.