By Shannon Page, Legal Intern

Marriage equality as a federal right is one step closer to reality.  The U.S. Department of Treasury and the Internal Revenue Service (IRS) jointly released a ruling on August 29, 2013 that changes how legally married same-sex couples will be treated for Federal tax purposes.  Revenue Ruling 2013-17 held that for Federal tax purposes, the IRS will now recognize a “marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.“ In other words, a valid same-sex marriage will be recognized in all states for Federal tax purposes, regardless of state of residence marriage laws.

For guidance, the IRS looked to United States v. Windsor, 570 U.S. __, 133 S. Ct. 2675 (2013), which held that the Defense of Marriage Act (DOMA) was unconstitutional in defining “marriage” as meaning only a legal union between a man and a woman as husband and wife.  The IRS also rejected DOMA’s narrower interpretation of the word.  Instead, the IRS broadened its definition of marriage to include same-sex couples in order to further efficient tax administration.

Anyone who is legally married is married for Federal tax purposes.  Now what?

The changes implemented by the Revenue Ruling became effective on September 16, 2013.  The change covers income taxes as well as gift and estate taxes.  The ruling will encompass anywhere marriage is a factor when it comes to filing.  For example, it will cover filing status, claiming personal and dependency exemptions, taking the standard deduction, contributing to an IRA, employee benefits, claiming the earned income tax credit, and claiming the child tax credit.  Married same-sex couples will also be able to file refund claims for taxes paid on previously taxed health insurance and fringe benefits provided by the employer that are excluded based on marital status.

Now, when legally married same-sex couples file, they may do as “married filing jointly” or “married filing separately.”  This change will also apply retroactively, meaning that married same-sex couples can file original or amended returns if the relevant statute of limitations has not expired.  The statute of limitations for filing a refund claim is generally three years from when the first filing was completed or two years from the date the tax was paid, depending on which one is later.  Married same-sex couples can use Form 1040X to file a refund claim for income taxes and Form 843 for a refund claim for gift or estate taxes.

So what does this mean for our North Carolina clients?  Even with Amendment One, our domestic partner clients who are legally married in another state are now considered married for federal tax purposes.  (Look for more information in future newsletters).

Who isn’t covered?

While the IRS is recognizing all legal marriages as equal for the purposes of Federal taxation, the ruling also held that certain partnerships are not covered. Civil unions, domestic partnerships, or other similar formal relationships recognized under state law that are not denominated as a marriage under the laws of that state will not be included in the IRS definition of marriage.

More than administration efficiency.

The Revenue Ruling reasons that a system that would differentiate between same-sex and opposite-sex married couples would be difficult to administer.  The IRS does not collect nor maintain the gender identity of taxpayers; therefore, an implementation of a system that did would require the retraining of administrators and revamping of systems.  The ruling avoids these complications and achieves uniformity, stability, and efficiency in the application and administration of the Internal Revenue Code.

In addition to administration efficiency, the ruling also protects legally married same-sex couples by doing away with the narrower interpretation of marriage that would burden same-sex couples, complicate their filing of Federal and state taxes jointly, and raise the cost of healthcare for families by taxing health benefits provided by employers to their workers’ same-sex spouses.

Estate Planning Opportunities

Some important estate planning opportunities have become available after the Revenue Ruling.  Legally married same-sex couples can now take advantage of the unlimited marital deduction under federal gift tax and estate tax laws by revising their estate planning documents.  Also, couples should review their retirement account beneficiary designations and joint and survivor annuity elections.  Legally married same-sex couples can now consider replacing individual life insurance policies with survivor policies in order to optimize death benefits as well as splitting gifts between spouses in order to maximize each spouse’s applicable exclusion amounts from either the federal gift tax or estate tax.  Some couples also may want to consider moving to a state that recognizes marriages of same-sex couples in order to obtain all of the federal non-tax benefits available to married same-sex couples after the Revenue Ruling.

Clear, coherent tax filing guidance.

Finally, the IRS expects to issue further guidance on issues such as payroll taxes on health insurance and fringe benefits provided to same-sex spouses as well as tax-favored cafeteria plans and qualified retirement plans and how they treat same-sex spouses.

Treasury Secretary Jacob J. Lew stated that the Revenue Ruling “provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide.  It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve.”