Key Tax Question on Gay Marriage

August 5, 2013
By Kaye A. Thomas

Update: The IRS has issued a ruling that addresses the most important issues discussed in this post. We’ll have detailed guidance in the near future but for now here are the main points:

  • For federal tax purposes, the IRS will treat same-sex couples as married if the marriage occurred in a state or country where such marriages are legal, even if they live in a state that doesn’t recognize such marriages.
  • IRS will not require couples to amend prior year returns, but couples are permitted to do so if an amended return would produce a refund for a year when they were married but required to file single, provided that year is still open under the statute of limitations.
  • Civil unions, domestic partners and similar relationships will not be treated as marriages.

More to come.

The Supreme Court’s decision in Windsor to overturn the Defense of Marriage Act raises many complicated tax issues. One of the most important is whether the marital status of same-sex couples will be determined based on the state of celebration or the state of residence. What happens if a couple has been married in a state where same sex-marriage is legal but now resides in a state where such marriages are not recognized?

Some federal agencies have ruled on this issue. The Defense Department, for example, will continue to treat a couple legally married in one state as married even if they move to another state that doesn’t recognize the marriage. Considering the frequency with which military personnel relocate to different states, this is an important ruling for the affected individuals.

The IRS has yet to speak on this question, and has not offered any clues as to how it will rule or when. Experts are divided on the likely outcome. The impetus seems to be in the direction of respecting same sex marriages based on the state of celebration, but there are some tax precedents that can be interpreted as supporting the opposite conclusion. Such a ruling would be problematic, as the result would be that a couple’s federal income tax would depend on their state of residence.

Employers have a big stake in this issue. Many of them provide group health benefits to same-sex spouses of employees. If the tax law treats these individuals as unmarried, the value of the benefit provided to the employee’s spouse must be reported as taxable income. Some employers have provided additional compensation to eliminate the tax disparity. Many other benefits-related questions depend on this issue.

A recent decision by a federal court in Ohio may have a bearing on this issue, although the case did not directly involve taxation. Obergefell v. Kasich involves a gay couple living in Cincinnati. One of the partners has a terminal illness. In an effort to assure that the other partner would be treated as a surviving spouse, they traveled to Maryland, where they were married, returning to Cincinnati the same day. Ohio law does not recognize same-sex marriage, but the court issued a preliminary injunction ordering the state not to record a death certificate for the partner whose death is imminent unless the certificate shows his status at death as “married” and shows his partner as his surviving spouse. The court noted that Ohio has for many years recognized the validity of marriages legally conducted in other states even when the individuals would not have been permitted to marry in Ohio due to age or consanguinity, and found that in singling out same-sex marriages for nonrecognition, Ohio violated the individuals’ equal protection rights under the U.S. Constitution according to the reasoning used by the Supreme Court in Windsor.

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