In June 2013, the Supreme Court ruled Section 3 of the Defense of Marriage Act unconstitutional. Section 3 limited the definition of marriage to couples of the opposite sex. This change has broad impact on the tax code and on eligibility for certain employee and retiree benefits. The IRS has just begun to set up the rules and procedures they will follow in recognizing these changes.
The IRS has gone on to explain how this ruling affects the interpretation of the tax law. To begin with, same-sex couples must be legally married. Therefore, the couple must have a legal marriage in a state where same-sex marriage is legal. Domestic partnerships and civil unions are not considered legal marriages at present, but this could change.
Marriage is Defined by Individual States
Since marriage is defined by the states, and most states do not allow same-sex marriages, there are some complexities in filing your 2013 taxes if you are a legally married same-sex couple. Your filing status for your federal return will be different than your state filing status. This is the case for Wisconsin.
Questions to Help Married Same-Sex Couples With Tax Planning
Here are a few questions you may have about taxes and benefits for married same-sex couples:
When can my same-sex spouse and I file income taxes as a married couple filing jointly?
You are required to file in 2013 as married filing jointly or married filing separately if you are legally married by the end of 2013. If you are legally married at the end of 2013, you cannot file as “single” on your Federal 1040.
We are behind on filing tax returns. My spouse and I have not yet filed 2012 tax returns. We want to each file as “single” for 2012 because our taxes are lower that way. Can we do that?
If you were legally married at the end of 2012, and you had not filed your 2012 tax return as of September 15, 2013, you are required to file either as married – joint or married – separate for 2012. You do not have a choice.
May we file as married filing jointly for prior years, even though we have already filed as “single”?
Yes, if you were legally married in prior years, you can file an amended return for all years open per the statute of limitations (3 years plus the current year). You are not required to amend your prior year returns, however.
We aren’t sure if we should amend prior year returns or not. Why would we want to do that?
This can be a very complex issue on many levels. Let’s assume that your only consideration is lowering your taxes for prior years. When you file “married filing jointly” the tax brackets, standard deduction amounts, eligibility for certain credits, taxability of health insurance, and limitations on losses are different than filing “single”, and this could either work in your favor or not. In general, if one of you does not have a paycheck or significant income, you may be able to lower your taxes by amending your return. However, there are too many factors to give you a pat answer, so I would recommend that you or your tax professional recalculate your taxes as a married couple in prior years first, to determine if your overall taxes are lower than they were when you originally filed as single taxpayers.
Under the new rules, how do we file our Wisconsin tax return?
Since the State of Wisconsin does not recognize same-sex marriage, you are not allowed to file as a married couple, even though you are required to file as a married couple for federal tax purposes. The only filing statuses valid for same-sex couples are “Single” or “Head of Household”.
Wisconsin has designed a new form, Schedule S, to accommodate splitting your federal adjusted gross income into single AGIs for each spouse. Your single AGI is the starting point for your Wisconsin returns. Adjustments need to be made for income and deductions that are only recognized for married couples, such as health insurance premiums and spousal IRAs.
Schedule S and a copy of the federal return should be attached to each of the Wisconsin returns you and your spouse file.
If I file a federal amended return to change my filing status to “married filing jointly” in prior years, should I also file an amended Wisconsin return?
Since Wisconsin does not allow same-sex couples to file as married, you should not amend your Wisconsin tax return for a change in filing status.
What about IRA contributions? My same-sex spouse and I would like to save as much as we can pre-tax in our IRA accounts, but I do not work outside the home. How much can we save?
As a married couple, even if one spouse has no income, you can each save the individual maximum amount ($5,500 for 2013, plus another $1,000 if you are 50 or over), provided you otherwise qualify. So you can take the full IRA deduction on your federal return.
However, if you live in Wisconsin which does not recognize same-sex marriage, the allowed IRA savings for the spouse without income will be less and a penalty will be assessed on the excess IRA contribution. So, if the spouse only has $1000 of income, and they saved $5,500 in a traditional IRA account, they will have to pay a Wisconsin penalty on excess IRA contributions of $4,500 at one-third of the federal penalty rate, or two percent. The penalty is probably still going to be less than the tax benefit received on the federal return.
My health insurance premiums my employer pays for my spouse are no longer being added back to my income and taxed. Do I have to do something special with these when we file our Wisconsin tax return?
Wisconsin still considers this benefit to be taxable, so you will need to add the premiums paid by your employer into your Wisconsin income. Your employer may reflect this information correctly on your W-2 for 2013, but make sure.
Can I claim Social Security death benefits or Social Security spousal benefits from my same-sex spouse?
If you are considered legally married by the United States government, you probably will qualify for benefits related to your spouse’s social security. The SSA has paid widow’s and widower’s claims by surviving members of same-sex marriages, and some retirement claims for same-sex married couples. However, they are still developing policies related to same-sex couples. SSA recommends that you apply for these benefits if you believe you may be eligible, to prevent losing the benefits. The SSA website indicates that you will not be fined if they deny your claim.
How does the recognition of legally married same-sex couples affect our estate planning?
Estate taxes kick in after the lifetime exclusion of $5,250,000 for 2013 and $5,340,000 in 2014. Married couples get an exemption for each spouse and can elect for that exemption to be used partially or entirely when the second spouse dies, yielding a total exemption of $10,500,000 for 2013 or $10,680,000 for 2014. In addition, the surviving spouse can inherit assets from the their spouse without paying tax, so they can take possession of the house and the liquid assets of the estate without going through probate or any legal proceedings. Prior to the DOMA ruling, same-sex couples could only take their individual lifetime exclusions on their assets when they died. A spouse did not automatically inherit their shared home or their other assets. By recognizing same-sex marriage, these huge advantages are now available to same-sex couples. These rules apply to federal estate tax only, however. In Wisconsin there is no estate tax, so there is no difference to account for by a same-sex couple.
Estate planning can also get quite complicated, and this discussion is simplified. I recommend you consult with your attorney to make sure your estate plans are up-to-date based on the huge impact this will have for you as a legally married same-sex couple.