More Guidance Issued on Tax Impact of DOMA Ruling
(Amended Returns May Yield Savings for Same-Sex Couples)
In a July 2013 article, we discussed the tax impact of the U.S. Supreme Court’s ruling that portions of the federal Defense of Marriage Act (DOMA) were unconstitutional. In that piece, we highlighted a number of questions raised by the ruling - proffering that the U.S. Department of Treasury and the Internal Revenue Service would ultimately provide some guidance on those issues.
That guidance was issued at the end of August via Revenue Ruling 2013-17 and updated Frequently Asked Questions (FAQs) available on the IRS website. The Ruling provides guidance on three issues.
First, the Ruling provides clarification of the terms “spouse,” “marriage,” “husband,” and “wife” as used in the Internal Revenue Code and Treasury Regulations. With over two hundred references to those words in the Code and Regulations, the Service’s holding that the gender-neutral term “spouse” includes: “an individual married to a person of the same sex if the couple is lawfully married under state law.” Likewise, “marriage” includes a marriage between individuals of the same sex. The Service further ruled that the terms “husband,” “wife,” and “husband and wife” should be interpreted to include same-sex spouses. The Service based its Ruling on the natural meaning of those terms, consistency with the U.S. Supreme Court decision in Windsor, and the belief that any narrower interpretation would not promote efficient tax administration.
Second, the Service held that a couple’s marital status for federal tax purposes is based on the laws of the State where a marriage is initially established. Regardless of the couple’s domicile at any time, the only requisite is that same-sex marriage be recognized in the State where the marriage is performed. Thus, even if a couple marries in a state where same-sex marriage is legal and then later moves to a state that does not recognize same-sex marriage, for federal tax purposes that marriage will continue to be honored. This was an area of critical concern given that currently only thirteen states recognize same-sex marriage. The Service felt that a uniform rule of recognition was essential for effective tax administration—surety for both the Service and the taxpayer will help achieve greater stability in interpretation and application of the tax laws.
The Service’s third holding clarifies that “marriage” does not include registered domestic partnerships, civil unions, or other similar relationships recognized under state law but not termed specifically as “marriage.” This holding applies to all couples regardless of whether the couple is same-sex or opposite-sex.
The Ruling has prospective application from September 16, 2013 forward, meaning that as of that date, all same-sex married couples must comply with the holdings by using either the married filing separately or joint filing status. This applies to all tax returns (including 2012 and older years) that are originally filed on or after September 16, 2013, including outstanding 2012 Forms 1040 for which extensions were filed. For taxpayers who filed their 2012 tax returns before September 16, 2013, they may choose—but are not required—to amend their returns. Likewise, for older years taxpayers may choose—but are not required—to amend their returns. Only returns for which the statutes of limitations have not expired may be amended.
In addition, the Ruling may be relied on retroactively to file amended returns to claim refunds for overpayment of employment tax and income tax with respect to employer-provided health coverage benefits. Such benefits provided by the employer are excludible from income based on an individual’s marital status. For employees who made a pre-tax salary reduction election for health coverage under an employer sponsored Section 125 cafeteria plan and also elected health coverage for a same-sex spouse on an after-tax basis under that employer’s plan, the taxpayer/employee may amend open year tax returns. Such amendments will allow the amounts paid by the employee for coverage of the same-sex spouse to be treated as a pre-tax salary reduction rather than an after-tax reduction for income tax purposes. An employer may also amend its employment tax returns to claim a refund for the Social Security and Medicare taxes paid on such benefits.
The Service will issue additional guidance addressing retroactive application of the DOMA decision to other employee benefits and employee benefit plans. Such guidance will address the consequences to the plan sponsor, the plan, employers, affected employees, and beneficiaries. Although no timeline was provided, the Service clearly understands that time is of the essence.
The IRS and Treasury guidance provides much sought clarity on the impact of the DOMA ruling. Taxpayers affected by the ruling should consider the tax planning and filing opportunities presented. It is also important to keep in mind the time sensitive nature of these opportunities, particularly with respect to filing amended returns.
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