Updating a previous release, in Rev. Rul. 2013-17, 2013-38, IRS ruled that same-sex couples legally married in any domestic or foreign jurisdiction will be treated as married for federal tax purposes, regardless of their state of domicile. In doing so, IRS resolved the question of what constitutes a lawful marriage that arose after the Windsor decision and, in the process, effectively dismantled what remained of the Defense of Marriage Act as it pertained to federal tax law. The ruling’s effective date is September 16, 2013.
In announcing this state of celebration rule, Treasury Secretary Jacob L. Lew stated that, “[t]oday’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve. This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”
Along with adopting this position, IRS also provided guidance as to both income and transfer tax filings going forward, as well as returns already filed. With respect to income tax filings, beginning in 2013, all same-sex couples legally married must file their federal income tax returns as either married filing jointly or married filing separately. In addition, 2012 returns not filed as of September 16, 2013 generally must also adhere to this filing requirement. Same-sex married couples living in non-recognition or non-marriage equivalent (for tax purposes) states will continue to file state income tax returns as single despite their married status for federal purposes.
For tax returns already filed but still within the statute of limitations period (generally the later of three years from the date of filing or two years from the date the tax was paid), same-sex married couples have the option of amending the return to reflect married status, but are not required to do so. This position allows same-sex couples to adopt the most tax-advantageous status of either being considered married or single. For income tax purposes, such determination must likely be made by re-running returns, changing the filing status to married. IRS also clarified that amounts paid for employer- provided health care coverage by an employee for a same-sex spouse could be treated as pre-tax dollars and thus, excluded from income. Refund claims based on this exclusion are also available for open years.
For gift, estate and generation-skipping transfer tax purposes, amending returns to incorporate the unlimited marital deduction (allowing spouses to transfer assets to each other free of all transfer tax) should be done in virtually all cases. Finally, same-sex married couples who divorced and paid income tax triggered by a settlement agreement should re-examine their returns.
The ruling also indicated that future guidance will issue procedures for employers who wish to file refund claims for payroll taxes on previously taxed health insurance and fringe benefits provided to same-sex spouses. Additional guidance will also be issued on cafeteria plans and how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for pre-September 16, 2013 periods.
Along with clarifying who is legally married, IRS also made clear who is not legally married. Couples (either opposite or same-sex) in registered domestic partnerships or civil unions are not considered married for federal tax purposes. As a result, at least from a tax perspective, same-sex couples in such arrangements may wish to consider getting legally married in a jurisdiction that allows same-sex marriage.
Although the Supreme Court stopped short of legalizing same-sex marriage in all 50 states, at least for federal tax purposes, IRS did not. By adopting the state of celebration rule, the Treasury has provided both clarity and potential opportunities for same-sex married couples.
The following states currently recognize same-sex marriage: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington State and the District of Columbia.
Carl C. Fiore is Managing Director in the New York office of WTAS. He has significant experience with tax and financial matters affecting entrepreneurs, executives and other high-net-worth individuals. He has worked with numerous families and closely held businesses to develop and implement wealth maximization plans through the use of family entities, income tax planning, stock option planning, charitable giving strategies, and effective gift and estate tax planning. Mr. Fiore’s primary practice areas are gift and estate planning as well as fiduciary income tax. He also has experience in federal and state income tax consulting and compliance for individuals, partnerships, fiduciaries, estates, corporations and private foundations. Mr. Fiore is a lead member of the firm’s estate planning group, which has extensive experience in serving the estate, gift, and fiduciary tax consulting and compliance needs of corporate and private trustees as well as individuals. He has also been published in Trusts & Estates. Before joining WTAS, Mr. Fiore worked in the Private Client Services practice of an international professional services firm, and as a trusts and estates associate at a national law firm.