SAN DIEGO, October 22, 2013 – Legally married same-sex couples now have some taxing decisions to make.
As a result of the June 26 U.S. Supreme Court decision regarding the 1996 Defense of Marriage Act, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. This means they now must file their 2013 federal income tax return as “married filing jointly” or “married filing separately.”
The couple does not have to live in a state recognizing same-sex marriages, but simply be legally married in a state or country where it is legal. U.S. Treasury Secretary Jacob J. Lew said this would assure couples their federal filing status wouldn’t change if they moved between states with different laws regarding same-sex marriage.
So, now that same-sex couples are treated as married for all federal tax purposes, there are new decisions they must make involving filing status, personal and dependency exemptions, standard deductions, their employment benefits, retirement contributions, and various tax credits. They must also consider gift and estate taxes.
There is also a decision to be made by couples in same-sex marriages back to 2010 whether to file an amended tax return for one of the tax years still open under the statute of limitations, which is three years.
Not all same-sex couples are going to benefit financially from this change in tax law. Many will get hit with the “marriage penalty” that many traditional couples have incurred over the years. This happens most frequently when both spouses earn income and their income is relatively the same, or when combined is more than $250,000 annually.
Others who will take a hit are couples with children where one spouse earns a much lower income. It will be more difficult to qualify for various tax credits (earned income tax credit, child and dependent care credit, educations credits) filing jointly. It will also hurt couples who adopted children. When they filed single returns, each could claim the maximum adoption credits and employer benefits. An amended return will cost half those benefits.
This tax law change could force some couples to face up to some unsavory financial issues. If tax returns filed individually from prior years are opened up and amended, the spouse is now opening him or herself to legal liability if there is anything fraudulent or flat-out criminal going on in that return. If you aren’t 100 percent sure you know everything about your spouse’s finances, you may be better off letting sleeping dogs lie. You may also want to be cautious and file as married filing separately.
If there is a tremendous potential refund coming and you have doubts but want to go ahead and amend the return, there is an “innocent spouse” provision that can protect you if you file jointly. It essentially relieves you of being responsible for paying taxes, interest and penalties because of misbehavior by your spouse if you can prove that you did not know and had no reason to know about it at the time. ‘
This doesn’t mean you won’t owe the IRS something. But you’ll only owe your half, not your spouse’s portion.
If you think you’re in this situation, you have far bigger problems than financial infidelity. You have a marriage sitting on very shaky ground. Financial problems remains the number one reason people get divorced. Couples with the lack of trust they often signify, it’s a death blow to a marriage.
Before you do anything, you might want to have a long heart to heart talk about your financial circumstances with your spouse. If you haven’t gotten everything out on the table, here’s no time like the present. You may want to sit down with a Certified Marriage and Family Therapist or similar licensed professional to work it all out long before you sit down with your tax professional.
There are other good reasons to amend your returns: if the couple sold a residence but only one spouse got the marital exclusion benefit; if a higher income might affect charitable contribution carryovers or result in a higher alternative minimum tax threshold; or if an ex-spouse who is paying alimony could not take a deduction for it and now may be able to do so.
One reason to file an amended return without question is if federal estate taxes were assessed on a surviving spouse because the IRS did not legally recognize the marriage. This was the reason behind the U.S. Supreme Court case in which a widow paid over $300,000 in estate taxes she would never had owed had her marriage been reoccgnized. This could generate some significant refunds.
Every situation is different and it’s important to get advice from a financial or legal expert in same-sex marriages before you make any decisions about your taxes.
Myra Chack Fleischer serves as Lead Counsel for Fleischer & Ravreby in Carlsbad, California with a focus on divorce, property, custody and support, settlement agreements, mediation, asset division and family law appeals. Read more Legally Speaking in Communities Digital News. Follow Myra on Twitter: @LawyerMyra.
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