Couples who marry in a state that recognizes same-sex marriage are now recognized as married for federal tax purposes regardless of their current state of residence, according to recent guidance from the IRS. But complications still await same-sex couples, who in many cases, must file separately for state tax purposes even after filing jointly at the federal level. At present, guidance from the states on how to compute taxable income under this scenario is lacking.
In June, the Supreme Court’s decision in United States v. Windsor struck down section 3 of the Defense of Marriage Act (DOMA), which allowed same-sex couples to file a joint federal tax return. However, there were lingering questions about the recognition of a same-sex marriage for federal tax purposes when the same-sex couple’s state of residence does not allow them to be married. If a state does not recognize same-sex marriage, will the federal government be required to recognize it?
In Revenue Ruling 2013-17 , the IRS has provided new guidance for this question by applying a 1958 Revenue Ruling on the subject of common-law marriage. In the 1958 ruling, the IRS stated that a couple would be treated as married for federal income tax purposes if they entered into a common-law marriage in a state that recognizes it as a valid marriage. Furthermore, the same treatment would apply to couples who later moved to a state where their common-law marriage is not recognized.
Applying the ruling to same-sex couples means that couples who marry in a state that recognizes same-sex marriage are now recognized as married for federal tax purposes regardless of where they live right now. This creates a “state of celebration” approach rather than a “state of residency” approach. Thus, couples could fly to one of the 13 states plus DC which recognize same-sex marriage, get married, then fly back to their home state and be allowed to file joint federal income tax returns.
Couples who currently live in a state that does not recognize same-sex marriage must still file separate state returns, but can now choose to file a joint federal return, beginning in 2014. Since most states reference the federal income tax return when calculating state tax liability, same-sex couples in non-recognition states will be required to calculate their separate federal income tax liability in order to pay state taxes. Only Alabama, Arkansas, Mississippi, New Jersey, and Pennsylvania do not begin state tax calculation by referencing the federal return.
The states which do not allow same-sex marriage but require taxpayers to utilize federal calculations must now provide further guidance to same-sex couples for how the couple should reference the federal return when calculating state tax. The affected taxpayer could be required to create a pro forma federal return or simply split the amount on the federal tax return by half. The state could create a whole new state filing status for couples in a same-sex marriage, or they could decouple from federal tax law completely. See the Tax Foundation’s report on the new IRS guidance for more information on the implications of each option.
The guidance surrounding tax treatment of same-sex marriages must continue to evolve, and the IRS guidance on the “state of celebration” rule is a good start. However, it is apparent that this will only happen with the participation of the states, whether they approve of same-sex marriage or not.
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