BY DUNCAN OSBORNE | Despite the 2013 US Supreme Court ruling that struck down the part of the Defense of Marriage Act (DOMA) that barred federal recognition of same-sex marriages, filing federal and state tax returns remains a complex endeavor for those couples as most states still do not recognize their marriages.
“We’re moving in the right direction,” said Yolanda Rego, tax supervisor at Gonzalez & Associates, a Massachusetts accounting firm. “The only thing that’s switching now is the roles are being reversed.”
Prior to the 2013 decision that invalidated the DOMA provision, married same-sex couples who lived in a state that recognized their marriage had to prepare a dummy federal tax return, as if married for that purpose, and use that to prepare their state tax return. They then filed their actual federal tax returns as single individuals. Now those couples can file their federal return as married or married filing separately.
Lack of universal marriage recognition in US creates confusion, inequities
“Most state tax codes say start with your federal return,” said Janis Cowhey, a partner at Marcum, LLP, a national accounting firm.
Some of the 19 states that allow gay and lesbian couples to wed only granted that right or made it effective this year so the benefit of that will come when they file for the 2014 tax year.
One persistent tax issue that arises occurs when a legally married gay or lesbian spouse is included on an employer’s health plan of the other spouse. The value of that benefit is counted as income, called imputed income, in states that do not recognize same-sex marriage. Since the DOMA ruling, the federal government no longer treats such benefits as imputed income. States that have an income tax and do not recognize same-sex marriages still do.
“What’s actually going to happen now is the opposite,” Rego said.
In states that do not recognize same-sex marriages, couples will prepare their federal return as married then prepare dummy federal returns as if they were filing as single to prepare their state tax returns.
The tax on imputed income is seen as particularly unfair for some in the community as married straight couples do not pay it. In effect, the married gay and lesbian couples who pay that tax are subsidizing a discriminatory scheme by paying taxes that married heterosexuals do not pay. Some employers have responded by increasing the pay of married gay and lesbian employees to compensate for the cost of the tax.
Even as the community is enjoying consistent wins, with federal courts striking down marriage bans or requiring state governments to recognize same-sex marriages performed in other states, the complexity and opportunities for mistakes that result from having marriages recognized by the federal government and in some states, but not in others, is apparent.
“It’s more complex for some people and easier for some people,” Cowhey said. “It’s still complicated.”
The Supreme Court ruling has provided some financial benefits. The IRS has allowed married same-sex couples to file amended returns to recoup some of the higher taxes paid on imputed income or as the result of filing as single in prior tax years. Cowhey said filing an amended joint return for some of her married gay and lesbian clients “saved them a lot of money.”
But Rego said that as her firm has prepared amended returns from past years for clients in Massachusetts, they have found that some employers made mistakes in reporting imputed income on W2s. Some did not report the income at all. Others reported the imputed income to the state as well as to the IRS, even though Massachusetts did not tax those benefits.
Another problem that persists is that married gay and lesbian couples who live in a state that recognizes their marriage, but earn income through employment or an investment in another state that does not recognize their marriage have to file as single in that other state if they earn enough to trigger the requirement to pay income tax.
“I have many clients who have K1s,” Cowhey said referring to the IRS document used to report income earned in a business partnership.
LGBT legal groups, most of which opposed suing for marriage in federal court as recently as 2009, are currently engaged in a race to get back to the Supreme Court for what they hope will be a ruling establishing marriage in all 50 states. Currently, there are marriage lawsuits in every state that bars recognition of same-sex marriages except North Dakota, which is expected to see a lawsuit soon. Efforts to enact marriage with votes in state legislatures and by ballot initiative continue as well.
The disparate tax treatment, among other penalties, of gay and lesbian marriages and the resulting financial burden it places on married gay and lesbian couples will continue as long as some states do not recognize those unions.
“This is actually pretty complex and will vary state to state,” Andrew Sherman, a senior vice president and benefits consultant at Segal Consulting, a Boston firm, wrote in an email. “And remember that not all states have income tax. And some states have income tax that is directly based on federal income tax, and others do not… Our advice to clients is that they really need to check with the tax authority in each ‘non-recognition state,’ on a state by state basis. (And know that all of this is in flux.)”