So, for example, if you’re legally married in New York, the IRS will consider you married even if you retire to Florida–a state that does not allow same-sex marriage and where there is strong sentiment against it. This ruling "assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change," said Treasury Secretary Jacob J. Lew.
Revenue Ruling 2013-17, announced today, applies to all federal tax provisions where marriage is a factor. That includes not just filing status, but also claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.
The ruling became necessary as a result of the Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act or DOMA. In United States v.Windsor, the Court overturned the section of the law which defined marriage as between a man and a woman, and spouses as heterosexual. But the Court stopped far short of meddling with state regulation of marriage, or expressing any opinion about what happens to anything other than federal rights when same-sex spouses cross state lines. Currently same-sex marriage is only legal in 13 states and the District of Columbia.
Following the Court's decision, pundits debated whether there was authority for federal agencies to apply a place of celebration approach, so that same-sex married couples would have access to the full range of benefits that are available to heterosexual spouses under federal laws and regulations. (See my post, "Feds Work Overtime To Fill Gaps Left By DOMA Ruling.") Today's IRS ruling tells us how the Supreme Court decision will be implemented in the context of federal taxes.
Under the IRS ruling, which will be published Sept. 16, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes.
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. Many gay couples who don’t live in a state that allows them to marry go elsewhere for the marriage ceremony, and then go back home. That’s precisely what happened with Edith Windsor, who brought the Supreme Court case. She and Thea Spyer, her partner of 44 years, lived in New York, but got married in Canada before New York legalized same-sex marriage. (See my report here.)
The trouble is that a same-sex couple who get married in a state that permits same-sex marriage may find their new marriage disregarded by another state they live in or move to or receive an inheritance from. There was some uncertainty after the Supreme Court's June decision about whether this would affect their federal tax status. The IRS made clear today that it would not. Here's how the IRS ruling will play out.
How This Affects Income Taxes
For the 2013 tax year, legally-married same-sex couples generally must file their federal income tax return using either the married filing jointly or married filing separately filing status.
How about past years? Couples who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes. If they got an extension to file the 2012 return, they have until Sept. 15 to decide whether to file that return as married or not.
They can also file claims for refunds for one or more prior tax years. Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Therefore, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.
To file a refund claim, use Form 1040X. For information on filing an amended return, see Tax Topic 308, Amended Returns, available on the IRS web site, or the Instructions to Forms 1040X. Information on where to file your amended returns is available in the instructions to the form.
Today's announcement also affects the taxation of health insurance. In the past, a worker who received employer-paid health coverage for a same-sex spouse had to pay federal income tax on the value of those benefits. That will no longer be the case.
How This Affects Estate and Gift Tax
Same-sex married couples, like other spouses can now transfer as much as they want to each other, either during life or at death, without having to pay any federal estate or gift tax, provided that the recipient spouse is a U.S. citizen. This is called the marital deduction.
These are federal estate planning benefits, in addition to the marital deduction, that will be available to same-sex couples as a result of today’s ruling.
Portability. This is the ability of widows and widowers to add the unused estate tax exclusion (now $5.25 million) of the spouse who died most recently to their own. The concept was introduced by the 2010 tax law (although the term was invented by tax geeks and does not appear in the legislation). Portability was made permanent by the 2012 tax law. (See my post, “After The Fiscal Cliff Deal: Estate And Gift Tax Explained.”)
To take advantage of portability, the executor handling the estate of the spouse who died will need to transfer the unused exclusion to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing an estate tax return when the first spouse dies, even if no tax is owed. This return is due nine months after death with a six-month extension allowed. If the executor doesn’t file the return or misses the deadline, the spouse loses the right to portability. (See my post, “The Deadline Every Married Person (And Financial Advisor) Needs To Know About.”)
Gift-splitting. Currently, you can give up to $14,000 each year to as many recipients as you would like without incurring gift tax. Spouses can combine this annual exclusion–a process called gift-splitting–to jointly give $28,000 to any person tax-free. Spouses can gift-split by giving $14,000 each, $28,000 from a joint account or $28,000 from one of their individual accounts. These restrictions apply whether you make outright gifts to individuals or put the funds into trusts for their benefit. (For more about annual exclusion gifts, see my post, “IRS Raises Yearly Limit For Tax-Free Gifts.”)
Any gift that’s more than the annual exclusion counts against the lifetime gift tax exclusion – the amount that each individual can give away during life without triggering gift tax. Once you have passed the limit, which is $5.25 million, gift tax of up to 40% applies. Couples can also gift-split with their applicable exclusion amount and together transfer up to $10.5 million through lifetime gifts.
To claim a refund claim for gift or estate taxes, file Form 843.
Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. You can follow her articles on Forbes by clicking the red plus sign or the blue Facebook “subscribe” button to the right of her picture above any post. She is also on Twitter and Google+
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