New Marriage Laws and Tax Code Changes

Laurie G. Dyke, CPA/CFF, CFE
IAG Forensics & Valuation
laurie@iagforensics.com

Same-sex legally married couples are now treated exactly the same as opposite-sex married couples for federal income tax purposes. Married = married. This is mostly good news for same-sex couples but there are still some transition issues and a few disadvantages, as there always have been with being married.

Since 2013, when the Supreme Court struck down Section 3 of the Defense of Marriage Act (United States v Windsor), same-sex married couples have theoretically been treated the same as opposite-sex married couples under Federal law. However, the IRS has looked to individual states to determine if a couple was married and, until recently, not all states recognized same-sex marriages. Thus, federal tax treatment has been potentially problematic in certain instances, such as when couples moved from states that recognized same sex marriage to states that recognized civil unions or when they got divorced in a “marriage” state and then moved to a state that didn’t recognize the divorce.

However, on June 26, 2015 in the Obergefell v Hodges case, the Supreme Court ruled that all states must recognize same-sex marriage. On September 2, 2016, the IRS released Revenue Bulletin 2016-38 (T.D. 9785), which included the adoption of the following definition of marriage:

“In general. For federal tax purposes, the terms spouse, husband, and wife mean an individual lawfully married to another individual. The term husband and wife means two individuals lawfully married to each other.”

The state in which the marriage is entered into determines the “lawfullness” of the marriage. It is helpful to note that the terms “spouse,” “husband” and “wife” do not include individuals who have entered into a registered domestic partnership, civil union or other similar formal relationship, only those in a legal marriage.

What does this mean for same-sex married couples? Same-sex married couples can file tax returns as married filing jointly or married filing separately but they cannot file as single. If the circumstances fit, they will be subject to the “marriage penalty” that impacts married couples with approximately equal incomes, so that they pay more in tax than they would if they were single. Again, if the circumstances fit, they will also receive the “marriage bonus” that impacts married couples with disparate incomes, allowing them to pay less in taxes together than if they were single. Married individuals must use the same method of computing tax deductions, i.e. itemized or standard, as their spouse.

A “qualifying child” for federal income tax purposes may be taken as a dependent by one of the parents but not both, the same as opposite-sex couples. Other credits may be available to married couples that are not available to non-married couples, based on various factors. Unfortunately, married couples sometimes get divorced and the tax rules relating to divorced or separated individuals are well codified in Publication 504, which now has a separate paragraph confirming that “married” is married, and same-sex couples are treated no differently than their opposite-sex counterparts who get divorced, for tax purposes.

The benefits of qualified retirement plans and IRAs apply to all married couples, including both contributions and death benefits. To the extent the IRC Section 401(a) qualification rules require a married participant’s spouse to be the participant’s beneficiary with respect to all or part of the participant’s benefits (unless the spouse consents to the participant’s designation of another beneficiary), profit-sharing and stock bonus plans must treat a participant who is lawfully married on the date of death to an individual of the same sex as married for purposes of applying those qualification rules.

While the Supreme Court rulings have clarified the law and the new IRS regulation has clarified the tax code, some complications may still exist for same-sex couples that do not exist for opposite-sex couples, particularly where state and federal tax laws are not completely aligned. For example, a same-sex couple may be in a formal relationship other than a marriage, which allows them to file joint income tax returns for state purposes but, because they are not legally married, they must file single tax returns for federal purposes. This article is intended to alert readers to potential issues in the IRS tax code and changes that have occurred with changes in the law; however, readers should not rely on this article alone when applying the changes. They are encouraged to do their own research and form their own conclusions.

Laurie G. Dyke, CPA/CFF, CFE is the founder and managing partner of the CPA firm IAG Forensics & Valuation. IAG specializes in forensic accounting, fraud investigation and business valuation.