Federal Taxes - Same-Sex Couples

Time Sensitive




Sep 5, 2013

As part of our Client Alert Series for new domestic & international tax developments which may impact your Global Mobility Program, please find below potentially significant Federal taxation changes that could affect hypothetical tax calculations, tax cost projections, federal tax returns, and net pay calculations for your assignees.

The US Department of the Treasury and the IRS, in releasing Revenue Ruling 2013-17, have announced that they will recognize same-sex couples as being married for federal tax purposes. The Treasury and IRS will begin applying the terms of the Revenue Ruling on 9/16/2013. However, taxpayers may rely on it for earlier periods assuming that the statute of limitations has not expired.

Please make sure you review our immediate recommendations below as they are time-sensitive!

Changes to note:

  • If a same-sex couple has been legally married either in a US State or a foreign country, their marriage will be valid for federal tax purposes no matter where they reside. It does not matter if the state they currently reside in does not legally recognize the marriage.
  • As an alternative to same-sex marriages, a number of states have created "civil unions" or "registered domestic partnerships" in their states. According to the IRS, these arrangements are NOT treated as legal marriages for federal tax purposes.
  • Under the ruling, same-sex couples will be treated as married for all federal tax purposes including income, gift and estate taxes.
  • The ruling applies to all federal tax provisions in which marriage is a factor, including: filing status, personal and dependency exemptions, standard deduction, employee benefits, IRA contributions, earned income credits or child tax credits.
  • A legally married same-sex couple must file as either married filing joint or married filing separate for the 2013 tax year.
  • For tax years prior to 2013, taxpayers may choose to be treated as married for Federal tax purposes for one or more prior tax years that are still open under the statute of limitations. This means that any individual, gift or estate tax return filed on or after can be amended for a refund if it was filed within the last 3 years.
  • If an original tax return for 2012 or any prior year has not been filed by 9/16/2013, then a same-sex couple, who is legally married as of that tax year, must file either a married filing joint or married filing separate Federal tax return for that tax year. 
  • If an employer provided health coverage for an employee's same sex spouse and included the value of that coverage in the employee's gross income, then the employee can file an amended 1040 return reflecting the employee's status to recover federal income taxes paid on the value of the health coverage of the employee's spouse.
  • If an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, a participating employee can file an amended return to recover income taxes paid on an after-tax basis for the health coverage of the employee's same sex spouse.
  • A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans, even if the employer is in a state that does not recognize same-sex marriages.
  • The Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses. The Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this ruling.

 

GMT recommends the following action:

  • Communicate this information to your assignees, especially if they wish to amend to a married-joint tax return for a previous tax return filed within the last 3 years, as the statute of limitations for claiming refunds for back tax years typically runs out 3 years after filing.
  • Consider revising any 2013 hypothetical tax calculations and tax cost projections to implement these new Federal tax rules.
  • For those 2012 tax returns (or prior years) that have not yet been filed, the rules for filing as married joint or separate take effect for those impacted starting September 16, 2013. For those wishing to continue filing as "single", you have until September 15, 2013 to file your 2012 or prior tax return under a "single" filing status if legally married under these new rules.

For further information regarding the effects of these Federal tax law changes, please refer to the IRS Frequently Asked Questions link: http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples.