Just before the government shutdown late last year, the IRS issued its guidance on same-sex marriages, clearing up years of confusion for many taxpayers. Based on this 2013 ruling, same-sex couples will be treated as married for all federal tax purposes, including income, gift and estate taxes.
In the past, these rules were murky at best. Couples were able to get married at the state level, but their marriage wasn’t recognized on their federal tax return and they were still paying much higher single filing rates. There were also scenarios when a couple married in a state that recognized same-sex marriage, but then moved to a state that didn’t recognize their marriage. The new law acknowledges these challenges and gives definitive information for taxpayers and tax preparers alike.
Formally called Revenue Ruling 2013-17, the ruling applies only to same-sex marriages legally entered into in a state that recognizes same-sex marriages. It excludes those in registered domestic partnerships and civil unions. Since these marriages are now recognized at the federal level, couples must now file either married filing jointly or married filing separately for their annual tax return. Couples are also allowed to amend tax returns for up to three past years, as the status of limitations allows, if they were legally married during those years and would receive a refund had they been able to file jointly at the federal level.
Perhaps a bigger gain than the benefit of filing jointly is the estate tax changes incorporated in this ruling. Married couples will gain the use of the spousal exclusion in estate planning, where you can generally pass assets to your spouse tax free upon your death. Prior to this change, same-sex couples could live together for decades and build a financial nest egg together, but when one passed away, the other faced up to a 40 percent tax when the assets passed to their loved one. Married couples are able to pass their wealth to a spouse tax free, so for wealthier couples, this is a tremendous difference.
The state side of things remains a bit tricky, as the states that allow couples to marry will also allow them to file jointly, but other states will still require couples to file single tax returns. In Colorado, our state tax code is directly tied to the federal government, so whatever your tax status is on the federal return must remain the same on your Colorado return. This is a plus for taxpayers, as it will be much easier than trying to file with different status on different returns.
For most couples, this will be a big positive move forward, providing them tax savings, estate planning advantages and overall simplicity.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.