Same-sex couples who got married in a state, U.S. territory or foreign country that recognizes their union will be treated as married for all federal tax purposes, even if they live in a state that does not recognize same-sex marriage, the U.S. Treasury Department and Internal Revenue Service said Thursday.
The ruling implements provisions of the Supreme Court's June 26 decision throwing out a key portion of the Defense of Marriage Act. Under that decision, it was clear that same-sex married couples living in states that recognize their marriage would be treated as married for all federal taxes and benefits.
But it was not clear how couples who were married in a jurisdiction where same-sex marriage is legal, but living in one where it is not, would be treated.
Thursday's ruling makes it clear that the IRS will look to the state where same-sex couples married, not where they live, to determine their marital status for all federal taxes purposes, including income, estate and gift taxes.
The IRS ruling takes effect Sept. 16. For federal returns filed on or after that date, all same-sex couples who married in a jurisdiction where it is legal must file their 1040 as married filing jointly or married filing separately, the same options open to heterosexual couples.
They will no longer be able to file as single or head of household, the options open to unmarried people.
The ruling clears up one major uncertainty for same-sex married couples living in the 37 states that don't recognize same-sex marriage. But it creates another one: how to file their state tax return, if their state imposes a state income tax.
The ruling "is huge," says Pat Cain, a Santa Clara University law professor. "It's going to put more and more pressure on states to conform to the federal rule." She says many states that do not recognize same-sex marriage will be forced to consider legalizing it -- if their state constitution does not prohibit it -- because of the state-tax complications it will present.
Of the 37 states that ban same-sex unions, 24 have state income taxes tied to the federal income tax, says Nick Kasprak, an analyst with the Tax Foundation. "Their state income tax says something like, start with your federal adjusted gross income," and then make changes based on state tax provisions.
In those states, "The simplest solution is to create a special filing status for gay couples that isn't called married but nevertheless allows you to file jointly," Kasprak says. But "that would be politically unpopular."
Another option would be to tell same-sex couples to split the income they reported on their joint federal return in half and use it to start their state-tax returns, Kasprak says. But that would not be fair to couples with disparate incomes.
A third option would be to decouple their state income tax system from the federal tax. Kasprak calls that the worst option because it would complicate taxes for all residents.
The government also said Thursday that employees who purchased health insurance coverage for a same-sex spouse from their employers on an after-tax basis may treat the amounts paid for that coverage as pretax and excludable from income.
For any federal returns filed before Sept. 16, same-sex couples can choose their filing status, a Treasury official said.
Depending on their relative incomes and other factors, filing a joint return instead of two singles could result in higher or lower taxes overall.
In general, couples with disparate incomes are more likely to pay lower taxes on a joint return. If the spouses have similar incomes, they are more likely to face a marriage penalty if their incomes are either very high or very low. If both spouses make similar, middle-income salaries, the tax impact of getting married is roughly neutral.
The same holds true for heterosexual couples. Kasprak has created a good visual representation of the marriage penalty and bonus situation. Go to http://tinyurl.com/pl2ny6q and scroll to Page 2.
Thursday's ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law. To learn more, go to http://tinyurl.com/qfhmeaw.