TaxesTax Filing Tax Issues Of Same-Sex Marriage

Gay and lesbian couples want relationship equality -- and are hoping to get that treatment with an upcoming U.S. Supreme Court ruling on the Defense of Marriage Act, or DOMA. If the high court strikes down the law, same-sex marriage would be legal in the eyes of the federal government.

Jurisdictions that recognize same-sex marriages

  • Connecticut
  • Delaware (effective July 1)
  • District of Columbia*
  • Iowa
  • Maine*
  • Maryland
  • Massachusetts
  • Minnesota (effective Aug. 1)
  • New Hampshire
  • New York
  • Rhode Island (effective Aug. 1)
  • Vermont
  • Washington*

*These jurisdictions also allow domestic partnerships.

When it comes to taxes, such equality could work in their favor. Or it may make things worse.

"From the perspective of tax equality, no one wants to pay more in taxes," says CPA Nanette Lee Miller, partner in the San Francisco-based accounting firm Marcum LLP."But with tax equality, everyone would be subject to the same rules."

Twelve states and Washington, D.C., recognize the marriage of same-sex couples. California could be added to that list, depending on the high court's ruling in a separate same-sex marriage case, which was heard in March, the day before the DOMA arguments.

On the federal level, however, DOMA defines marriage as a legal union between one man and one woman. And that makes a big difference in how some tax laws are applied. Following are some issues of same-sex marriage and how the income tax laws differ for conventional married couples.

Filing a federal return

A legally married same-sex couple cannot file a federal married-filing-jointly 1040 tax return or even a married-filing-separately 1040 tax return.

These couples must file two returns, with each partner sending the Internal Revenue Service a Form 1040 as a single taxpayer or, if children are part of the family, with one designated partner filing as a head-of-household taxpayer.

Because the 10 percent and 15 percent federal income tax brackets for married joint filers are double that of single taxpayers, the filing differences don't make that much difference to taxpayers whose total income falls in these lower brackets. This relatively recent change to tax law was made to ease the marriage tax penalty, which occurs when a couple filing jointly pays more than they would if the spouses each filed returns as single taxpayers.

Tax impact on $100,000 salary for different married couples

Tax due for heterosexual married couple filing jointlyTax due for same-sex married couple filing separate single returnsDifference
100% income earned by one spouse$11,858$19,585$7,727
90% income earned by one spouse/10% by the other$11,858$17,294$5,436
80%/20% income split$11,858$16,043$4,185
70%/30% income split$11,858$13,483$1,625
60%/40% income split$11,858$12,483$625
50%/50% income split$11,858$11,858$0

Assumptions: household income of $100,000; couples take the standard deduction; 2013 tax rates; no children and no tax credits. Source: HandR Block.

But once the income levels increase, the filing-status options and their tax effects are more pronounced. And when couples earn vastly different incomes, joint filing in some cases produces a combined income that receives better tax treatment. Same-sex couples, however, don't get to take advantage of this joint-filing benefit.

"If one partner makes more, there's no benefit of graduated tax rates," says Miller. "There's no averaging of income where a couple would typically pay a lower tax rate if one makes substantially more than the other partner because the lower earnings of one spouse would pull the higher-earning partner's income down."

Of course, it could work the other way.

If DOMA is invalidated, some jointly filing same-sex married couples could face the same higher tax problem as their heterosexual counterparts. The marriage tax penalty tends to kick in when both partners earn roughly the same amount, especially if both are in the higher tax brackets.

In anticipation of the ruling, Miller advises her clients to run the numbers to determine whether they will pay more or less in taxes if DOMA is repealed.

If the court does render the law unconstitutional, CPA John J. Masselli says same-sex married couples should immediately amend any open tax years (generally those filed within the past three years) to file as married filing jointly for federal purposes.

"Of course, I would only recommend this strategy if the outcome will result in a more beneficial tax outcome," says Masselli, who also is a tax professor in the Texas Tech University Rawls College of Business.

More work required

In addition to the taxes themselves, issues of same-sex marriage include the necessity for couples to do more work at tax time. And that usually translates to increased fees for tax preparation and advice.

When a same-sex couple lives in a state that has an income tax and that recognizes their marriage, they can file jointly in that state. This also is true if they are in states that recognize civil unions and registered domestic partnerships the same as marriages for tax purposes.

States with civil unions

States with only domestic partnerships

Same-sex couples in civil unions are granted state-level spousal rights.

  • Colorado
  • Delaware*
  • Hawaii**
  • Illinois
  • New Jersey
  • Rhode Island*

Unmarried couples in domestic partnerships, including same-sex, are granted some or nearly all state-level spousal rights.

  • California
  • Nevada
  • Wisconsin
  • Oregon

*Civil unions will no longer be available in Delaware and Rhode Island when those states' same-sex marriage laws take effect. A civil union is a legal status created by several states and which provides legal protection to same-sex couples in the applicable states only. Civil unions typically are not recognized outside the couples' state of legal residency.

**Hawaii also allows domestic partnerships. A domestic partnership is a state-sanctioned legal status that allows unmarried couples, heterosexual and same-sex, to formalize their relationships and which extends some state rights to those couples.

One problem with taxes is, however, that most states use taxpayers' federal returns as the basis for filing a state return.

In order to have the correct numbers from a federal return to plug into a joint state return, same-sex couples must fill out a federal return. So same-sex couples typically complete a dummy federal joint return to use as the basis for their state taxes.

That means four returns: one joint state filing, a fake federal joint return and two single federal 1040s for each partner. If the couple uses a tax professional, that extra tax work means additional costs for the taxpayers.

The costs can go beyond just filing season.

"Most heterosexual married couples feel protected by tax laws," says Miller. "But because of DOMA, same-sex couples have to be proactive." That means more planning and more professional fees in addition to the added tax considerations.

If, for example, you cover your domestic partner on workplace health insurance, it's a taxable event to the partner who provides the coverage. That's an expense that heterosexual couples don't face, since the spouse in a man-and-wife marriage is part of the federally tax-free family coverage.

"That's typically between $3,000 to $5,000 a year," says Miller. "Some employers will gross it up to cover the tax, but others won't, so you have to be prepared for the expense."

Companies that "gross up" employee compensation build the tax cost of the added income into the payment so that when taxes are accounted for, the worker still nets the full amount of the intended bonus or benefit.

But if a workplace doesn't add the extra money to cover taxes, that's one more cost and added tax planning for same-sex husbands and wives whose marriages aren't recognized by Uncle Sam.

Copyright 2013, Bankrate Inc.