The U.S. Supreme Court decision in Obergefell v. Hodges to legalize same-sex marriages across the United States is a major win for married gay and lesbian taxpayers.
Since 2013, same-sex couples have been able to file a joint tax return to report and pay their federal taxes. However, many of the couples still had to fill out state returns as if they were single taxpayers because their states did not allow or recognize their marriages.
Now joint tax returns can be filed at all levels, unless, of course, the couples find they get a better tax result by submitting their taxes as married filing separately. The bottom line is that there is tax-filing conformity for all married taxpayers nationwide, regardless of sexual preference.
State of celebration
Gay and lesbian couples received good federal tax news shortly after the Supreme Court’s June 26, 2013, decision that invalidated the part of the Defense of Marriage Act, or DOMA, that defined marriage as between one man and one woman. Following that ruling, the IRS 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 in Short Hills, New Jersey. “It is a huge win for married couples.”
State and federal tax return conformity, 2015 tax year filing
|No state income tax on wages|
|Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming|
|State tax on interest and dividend income only|
|New Hampshire, Tennessee|
|State tax return starts with federal adjusted gross income and then applies one rate|
|Illinois, Indiana, Michigan, Utah|
|State starts with federal taxable income and then applies one rate|
|State starts with federal taxable income and then applies its own rates to federal brackets|
|North Dakota, Vermont|
|State starts with federal taxable income and then applies its own rates and brackets|
|Minnesota, South Carolina|
|State starts with federal adjusted gross income and then applies its own rates and brackets|
|Arizona, California, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Virginia, West Virginia, Wisconsin|
|State starts with federal gross income and then applies its own rates and brackets|
|Massachusetts, District of Columbia|
|State income tax calculation does not reference federal return|
|Alabama, Arkansas, Mississippi, New Jersey, Pennsylvania|
Source: Tax Foundation
Estate taxes, too
The latest Supreme Court ruling also should simplify state estate and inheritance tax issues.
Two years ago, the IRS noted in its announcement that its treatment of same-sex couples as married for all federal tax purposes includes estate tax provisions. It was, after all, an estate tax issue filed by a New York widow following her wife’s death that led to the invalidation of the DOMA definition of marriage.
Few filers are affected by the federal estate tax because estates valued at up to $5.43 million for 2015 are exempt from taxation. Separate state estate and inheritance taxes, however, remained costly for same-sex couples living in states that do not recognize their marriages.
Twenty states collect estate tax, inheritance tax or both. As with the federal law, most exempt a portion of an estate, typically $1 million or less, from taxation.
Of the states that collect taxes after death, most already recognized same-sex marriages.
Taxation of estates or property left to heirs
|17 jurisdictions recognize same-sex marriage and collect estate tax, inheritance tax or both|
|Connecticut: estate tax
Delaware: estate tax
District of Columbia: estate tax
Hawaii: estate tax
Illinois: estate tax
Iowa: inheritance tax
Maine: estate tax
Maryland: estate tax and inheritance tax
|Massachusetts: estate tax
Minnesota: estate tax
New Jersey: estate tax and inheritance tax
New York: estate tax
Oregon: estate tax
Pennsylvania: inheritance tax
Rhode Island: estate tax
Vermont: estate tax
Washington: estate tax
|3 states did not recognize same-sex marriage, civil unions or domestic partnerships before the high court ruling but do collect inheritance tax. Now same-sex heirs here will receive the same treatment as all married heirs.|
|Kentucky: inheritance tax
Nebraska: inheritance tax (county level)
|Tennessee: inheritance tax|
Sources: State tax departments and Bankrate.com
Where an estate or inheritance tax is in place, most states follow the federal lead and allow spouses and, in some cases, certain other family heirs to inherit property without any limits.
This will make for an easier transfer of assets during a difficult time. It also should save same-sex couples money on estate planning, because they will no longer have to implement often complicated structures to ensure that their property goes as they wish to their spouses.