Same-Sex Married Couples Await State Tax Word

Sept. 16 is a watershed tax day for some same-sex married couples. From that day forward, they must file as married -- jointly or separately.That means their added filing tasks come to an end when it comes to completing both federal and state tax returns.

Other gay and lesbian couples, however, are finding that their tax-time double duty has simply shifted to state paperwork. All the shuffling of state and federal 1040 forms is thanks to the Supreme Court's June 26 decision that invalidated the part of the Defense of Marriage Act, or DOMA, that defined marriage as between one man and one woman.

The good news for gay and lesbian couples continued in late August, when the Internal Revenue Service 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. "It is a huge win for married couples."

Under the celebration instead of residency standard, a couple in Texas, which does not recognize same-sex marriages, could head to California, exchange vows and return home to the Lone Star State. They then would file a joint federal tax return and not have to worry about state taxes, since Texas is one of seven states without an income tax on wages.

But many same-sex married couples who live in states that do collect income taxes will have some filing work ahead.

Still twice the tax work for some

The IRS decision does eliminate a common complaint of same-sex married couples who live in states with income taxes. Because most states rely on some portion of taxpayers' federal return information, same-sex married filers who had been able to file a joint state tax return previously had to complete a mock federal joint Form 1040 to use as their state basis.

Now that federal return effort won't be wasted. The 1040 they fill out as a married couple will actually go to the IRS for processing.

Source: Tax Foundation.

1 federal, 2 state returns

But while same-sex couples are celebrating in states that recognize they're married and which collect state taxes, those in other states, along with state tax officials and tax professionals, are left scratching their heads.

Will states that don't recognize same-sex marriage still follow the IRS and accept joint tax returns from the couples?

That was the advice Kathryn M. Morgan, an enrolled agent and master tax adviser for HandR Block in Shreveport, La., got from Louisiana tax officials. "Through unofficial email and conversations with the Department of Revenue, I've been told to file the state material like the federal ones," says Morgan.

But she's approaching the situation from a trust-but-verify perspective. Morgan and other tax professionals nationwide await promised additional word from the IRS as well as formal guidance from their state tax offices.

"Everybody is in limbo," says Morgan. "We are still waiting on responses from the IRS and the states as the clock ticks ever closer. I have advised my clients to let me work up the numbers, file the returns, including the state jointly, if they work in their favor and then wait for a ruling. Or to let me file a protective claim for the state for 2009 and unfiled 2012 returns so they don't lose their rights to those refunds." By a protective claim, Morgan means filing a claim for a refund while a tax issue is evolving. This preserves the taxpayer's right to claim a refund when the matter is resolved.

Most tax experts expect states that do not acknowledge same-sex marriage to continue to require their residents to file as single or, if they have children, head of household taxpayers.

That's the case in Wisconsin. The state's Department of Revenue website tells its taxpayers that, "Individuals who entered into a same-sex marriage in another state cannot file a Wisconsin income tax return using a tax status of married filing jointly or married filing separately."

Estate taxes, too

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 $5.25 million for 2013 are exempt from taxation. Separate state estate and inheritance taxes, however, could be 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. Where an inheritance tax is in place, spouses and in some cases certain other family heirs are allowed to inherit property without any limits.

Of the states that collect taxes after death, most recognize same-sex marriages. Others grant equal estate and inheritance tax treatment to their residents who are registered civil unions or domestic partnerships. Four states do not recognize any same-sex relationships, meaning gay and lesbian widows and widowers will not be afforded any of the state benefits that their heterosexual counterparts are granted.

Sources: State tax departments and Bankrate.com.

Young, who is based in Short Hills, N.J., says that in order to get the maximum tax benefit of marriage, same-sex married couples in the Garden State need to register with the state as a civil union and then take a short trip to neighboring New York to get married.

With the civil union, each spouse would be covered under New Jersey's estate and inheritance tax laws. Getting married in New York would solve any federal estate tax concerns since the IRS would accept that ceremony even though the couple formally lives in New Jersey.

Things would be more complicated, however, if the same-sex married couple lived a few miles farther west in Pennsylvania, which has an income tax and an inheritance tax and does not recognize gay marriage, civil unions or domestic partnerships. As Keystone State residents, the couple likely would have to file separate single state tax returns and the surviving spouse would get no state tax protections.

In the many states that do not recognize and in fact specifically ban same-sex marriages, it will likely be some time before gay and lesbian couples there receive equal tax treatment. Young believes, however, that the IRS ruling will put pressure on domestic partnership and civil union states to recognize same-sex marriages.

"For so long states have passed these substitutes in lieu of marriage, saying that couples get the same treatment as married couples. The rationale has always been it's the same thing as marriage," he says. "But it's very clear that it is not the same thing and you do not get the full benefits."

The one thing the IRS ruling does offer, though, is clarity.

"It's clear that it only applies to married couples, not civil unions or domestic partnerships. It's not necessarily the best news, but at least we know," says Young.