Tax Complications for Same-Sex Couples

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December 18, 2009

Same-sex couples face a very complicated set of tax circumstances. In states that recognize same-sex marriage, these couples are married (or treated as married for tax purposes), but the union is not recognized under federal law. This creates many undesirable side effects. The following is an overview of issues to think about1, 2. However, if you are in a same-sex marriage, please do contact us for more specific advice.

Filing Status. Married couples typically file as either "Married Filing Jointly" or "Married Filing Separately" for federal income tax purposes. Because of federal law, same-sex couples cannot claim married status on their federal income tax returns. Many states calculate income tax by starting with federal income tax items (income, etc.). Thus, this can be very complicated -- for federal income tax, both partners in a same-sex marriage will likely take either "Single" or "Head of Household" filing status. However, under state law, the partners may be able or required to take a married filing status. Thus, to properly calculate income tax liability, they may need to create a "dummy" federal tax return with their married filing status, from which the state return can be generated.

For example, if a same-sex married couple in Massachusetts is filing income tax returns, the partners will have to prepare two income tax returns for federal income taxes (both claiming "Single" or "Head of Household" status). But, for state taxes, the couple will have to prepare a dummy federal tax return claiming married status in order to prepare the state return. Thus, the partners need to prepare four returns (assuming no taxation in any other states).

Preference Items. Couples that are married receive certain benefits under the federal income tax laws. For example, when an employer provides health insurance to a married couple, the premiums paid for the insurance are paid for with pretax dollars. For a non-married couple (including for those in a same-sex marriage), these benefits must be paid for with after-tax dollars -- so, the employer-paid premium for the same-sex partner would be considered additional wages to the employee, and the employee-paid premium would be paid for with after-tax money. Additionally, married couples are able to contribute greater amounts to individual retirement accounts (IRAs), even if only one spouse works. This benefit is not available to non-married couples.

Spousal Transfers. Under the tax laws, spouses can transfer unlimited amounts of money between each other during the marriage or pursuant to a divorce. So, there are no tax consequences on transfers of wealth from one spouse to the other. However, transfers of wealth between non-married persons (including those in a same-sex marriage) may be subject to the gift tax rules. Currently, individuals are required to report gifts of $13,000 in a year. While you may not think this will affect most couples, it can be an issue if one same-sex partner supports the other -- the amount of support may be considered a gift! This can also be an issue if same-sex partners buy property together (but put unequal amounts of money in).

Inheritance. Under the federal tax laws, one spouse can generally pass an unlimited amount of wealth to the other spouse at the first spouse's death, without any tax consequences. Again, since same-sex couples are not "married" for tax purposes, this benefit does not apply to those in a same-sex marriage. Thus, a same-sex partner will be treated as any other estate beneficiary would be and, if the estate is large, there could be significant negative estate tax consequences. Same-sex couples should be more careful about estate tax planning to mitigate these consequences.

These are the most significant tax problems facing those in same-sex marriages, but there are numerous others that will depend on particular facts and circumstances. If you have any questions on this material, please feel free to contact us.