State Income Tax Filing Requirements for Same-Sex Married Couples in Light of Rev. Rul. 2013-17

Editor: Mary Van Leuven, J.D., LL.M.

State & Local Taxes

Thousands of same-sex couples will have filed their first federal joint income tax return this year due to last year’s Supreme Court decision and Rev. Rul. 2013-17. However, the revenue ruling applies only to federal income tax returns and does not require states to allow same-sex couples to file a corresponding joint state return. Most states that ban same-sex marriage also prohibit legally married same-sex couples from filing a joint state income tax return. This item addresses some of the major filing requirements and issues that same-sex couples may encounter in filing their personal income tax returns.

The Windsor Case

In Windsor, 133 S. Ct. 2675 (2013), the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA), P.L. 104-199, which defined “marriage” as a legal union between one man and one woman, as violating the Fifth Amendment. The Court concluded that the law deprived the respondent in the case, Edith Windsor, “of the liberty of the person protected by the Fifth Amendment of the Constitution” by denying her the estate tax exemption for surviving spouses.

Shortly thereafter, the IRS released Rev. Rul. 2013-17 and a list of frequently asked questions as technical guidance for the federal tax treatment of returns from same-sex married couples. The ruling treats same-sex married couples as married for all federal tax purposes, including income taxes and estate taxes, and thus allows them to file joint federal tax returns. Rev. Rul. 2013-17 is effective for returns filed on or after Sept. 16, 2013. Same-sex married couples may amend any returns filed prior to the effective date to reflect their marital status and claim any resulting refunds, provided they were legally married in that year and the statute of limitation for filing refund claims has not lapsed.

The ruling applies a “state of ceremony” standard, i.e., so long as the same-sex couple are legally married in a state that recognizes same-sex marriage, they are treated as married for all relevant federal tax provisions no matter where they subsequently reside. The ruling does not extend to registered domestic partnerships, civil unions, or other similar relationships that are not considered a marriage under state laws.

State Approaches to Returns From Same-Sex Married Couples

Some states allow same-sex married couples to file under the same methods allowed for opposite-sex married couples in that state, including filing a joint return. Four states that do not allow same-sex couples to marry nevertheless permit or require legally married same-sex couples to use the same options allowed for opposite-sex married couples in that state. The remaining states that prohibit same-sex marriages do not allow these filing options.

States that permit same-sex couples to file joint state returns: As of this writing, 19 states and the District of Columbia permit a legally married same-sex couple to file a joint state income tax return. Sixteen of these jurisdictions recognize same-sex marriage: California, Connecticut, Delaware, the District of Columbia, Hawaii, Illinois (effective June 1, 2014), Iowa, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Rhode Island, and Vermont.

Four states (Colorado, Missouri, Oregon, and Utah) permit legally married same-sex couples to file joint state returns even though the state bans same-sex marriage. Oregon recognizes same-sex marriages from other states and countries.Same-sex married couples generally must use the same filing status for Oregon and federal income tax returns. Additionally, even though a federal district court opinion overturning Utah’s ban on same-sex marriages was stayed pending appeal, Utah permitted same-sex couples who were legally married, including those who married in Utah prior to the stay, to file joint state returns for 2013.

Of particular interest is Missouri’s position. Despite the fact that Missouri bans same-sex marriage, Gov. Jay Nixon issued Executive Order 13-14 directing the Department of Revenue to accept joint returns from same-sex couples.In that order, Nixon indicated that Missouri’s revenue code is coupled to the Internal Revenue Code, and therefore, Missouri’s definition of “husband and wife” must mirror that of the federal government. Many other states similarly couple their state tax code to the IRC, and a number of states provide that a term used in the state code has the same meaning as the same term in the IRC unless a different meaning is clearly required or the term is otherwise defined in the state code. Presumably, these states are asserting that their statutory or constitutional prohibition on same-sex marriage overrides their conformity to the IRC and the meaning of terms in the IRC.

While, in addition to Utah, federal district courts in Michigan, Oklahoma, Texas, and Virginia have overturned those states’ bans on same-sex marriages, those rulings also have been stayed pending review of the cases, and, thus, same-sex marriages are not recognized in those states. Also, a federal court in Kentucky overturned that state’s ban on recognizing out-of-state same-sex marriages, but the ruling has been stayed pending review. Finally, a federal judge in Ohio has indicated that he will also require the recognition of same-sex marriages performed in other states in a forthcoming order. Both Kentucky and Ohio currently prohibit in-state same-sex marriages.

States that prohibit same-sex couples from filing joint state returns: As may be expected, same-sex couples who file a joint federal return will likely face the most tax compliance burdens in the 33 states that prohibit same-sex marriage. Seven of those states do not have a general personal income tax and, as noted above, four permit or require joint filing by same-sex spouses. Three of the remaining states, Arkansas, Mississippi, and Pennsylvania, do not reference federal gross or taxable income and thus require separate returns. The 19 remaining states that ban same-sex marriage generally employ one of two approaches.

Under the first approach, state-issued guidance requires same-sex couples filing a joint federal return to file individually for state purposes by allocating income to two single state returns using a state-provided schedule.The second approach requires same-sex couples to file as they would have before Rev. Rul. 2013-17, which generally requires each spouse to prepare a pro forma federal return. The exhibit below lists the states that use each approach.

Realistically, whether a jurisdiction requires a specialized schedule or a pro forma return, the end goal is the same: bifurcating a same-sex couple’s federal income into individual components. Some of these states require the pro forma returns or other specific forms to be attached to the state return. Taxpayers in these jurisdictions should consult the specific guidance in each state.

Alabama and Montana fall outside these two approaches. Alabama requires same-sex couples who file jointly for federal purposes to allocate income based on the ratio of each individual’s separate federal adjusted gross income to the combined federal adjusted gross income.Montana has released a memorandum from the director of the Department of Revenue (Oct. 1, 2013) indicating that a same-sex joint return is not a valid filing option, but it also states that the department will not undertake any compliance initiative to verify the validity of marriages on joint returns.

Where to Go From Here

While most states have provided detailed guidance and instructions on whether same-sex married couples may file jointly for state purposes, those couples could encounter many other considerations that state guidance does not address. For instance, consider a same-sex couple legally married and living in a state that did not formerly recognize same-sex marriage but now does. If the couple files an amended federal return to claim a refund, can they also file an amended state return for a year when their marriage was not recognized in that state? Rhode Island recently issued guidance stating that it will require an amended return for years in which it did not recognize same-sex marriages if an amended federal return is filed. Note that filing an amended joint federal return is not always beneficial, especially if both spouses’ incomes are roughly equivalent, generally due to the interplay of the graduated brackets for federal purposes (see LeBlanc and Andrews, “Retroactive Tax Planning After Windsor,” 45 The Tax Adviser 354 (May 2014)). Also, if filing a joint state return in a previous year would have been advantageous, can a same-sex couple amend their state returns if they do not amend their federal returns?

Another source of potential complexity concerns same-sex married couples living in one jurisdiction but working in another. Consider the example of a couple who live in a jurisdiction that requires filing a joint state return, but one or both work in a jurisdiction that prohibits a joint filing and there is no reciprocity agreement between the two states allowing payment of tax only in the state of residence. In computing the credit the state of residence allows for taxes paid to the state of work, would the couple compute the tax for the state of work as filed (i.e., separately), or would they create a pro forma nonresident joint state return to determine the credit available on their joint return in the state of residence? Presumably, if the situation were reversed and one or both same-sex spouses work in a state requiring filing joint returns but live in a state prohibiting such a filing, then they would create pro forma returns for claiming the credit in the residence state that does not allow joint filing, but this is not entirely clear. Similar issues may exist in so-called reverse credit states where a credit is claimed in the state of nonresidency for taxes paid on the same income in the state of residence.

Also, issues may arise in regard to nonincome taxes such as sales and use, realty transfer, and gift and estate taxes. Many states exempt transactions between spouses from these taxes. Will such exemptions now apply to transactions such as the transfer of realty, cars, or other personal property? It might be expected in states that have revised their definitions for all tax purposes to include same-sex couples within the definition of spouses. But what about states such as Colorado, Missouri, and Oregon that do not recognize same-sex marriages but have decided to conform to their federal income tax treatment? Would the same treatment apply outside the income tax context?

Undoubtedly, Rev. Rul. 2013-17, while providing guidance for federal tax purposes, has created numerous questions for state income and other tax purposes. A number of states have issued specific advice covering some of these issues, generally in the form of Q&As. Additional questions are sure to arise. This evolving area of tax compliance is likely to be a source of issues for years to come.

EditorNotes

Mary Van Leuven is senior manager, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.

Unless otherwise noted, contributors are members of or associated with KPMG LLP. The information contained in this item is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This item represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.