Retroactive Tax Planning After Windsor

A tax return engagement usually does not begin with the question, “Should this couple amend prior-year returns?” But the Supreme Court’s holding that Section 3 of the Defense of Marriage Act (DOMA)1 was unconstitutional triggers just this question for same-sex married couples.

DOMA, which was enacted on Sept. 21, 1996, defined the word “marriage” as a legal union between one man and one woman as husband and wife. DOMA further defined the word “spouse” as a person of the opposite sex who is a husband or a wife. This legislation in effect barred federal recognition of same-sex marriages for all purposes, including Social Security survivors’ benefits, insurance benefits, immigration, and income tax filing.

On May 17, 2004, Massachusetts became the first U.S. state to recognize same-sex marriages.2 Since then, 17 states and the District of Columbia have legalized same-sex marriage, and same-sex partners have married in these states.3 On June 26, 2013, the U.S. Supreme Court ruled that Section 3 of DOMA was unconstitutional,4 leading the IRS to announce two months later, in Rev. Rul. 2013-17, that all legal same-sex marriages would be recognized for federal tax purposes.

Rev. Rul. 2013-17 specifically states that same-sex couples who filed their returns before Sept. 16, 2013, may choose to, but are not required to, amend their federal tax returns for prior years. Taxpayers who were in legal same-sex marriages before last year can now decide whether to amend prior-year returns.

This article uses several examples involving a married couple, A and B, to illustrate some of the relevant points.5 Assume that A and B were legally married for many years in Massachusetts, where same-sex marriage was recognized beginning in 2004. During 2010, 2011, and 2012, the years still open under the statute of limitation for filing amended returns, each of them filed a separate federal income tax return, Form 1040, U.S. Individual Income Tax Return.

B and A married in Massachusetts shortly after same-sex marriage was legalized in 2004. B was born in 1970, and A was born in 1979. B became unemployed in late 2010 and started collecting unemployment for the end of that year and for 2011 and 2012. In 2012, B became self-employed. A continued to work throughout this period except during maternity leave in 2011.

2010: Single vs. Joint Filing

In 2010, A and B both had wages, with B’s wages totaling more than $160,000, causing their combined returns to have more than $200,000 in wages. A, the lower-wage earner, had a tuition deduction of $3,800 on her separate return. Filing jointly, the couple would lose the tuition deduction because their combined modified adjusted gross income would be well over the $160,000 limit for taking the deduction for taxpayers filing jointly. Although B itemized on the original return, A did not. If they amended their return, A would lose more than half of the benefit of a standard deduction, since only A’s state withholding would be deductible on the joint return, which is less than the standard deduction. Amending their return to file married filing jointly would increase taxes by more than $1,834 (see Exhibit 1).

2011: Single and Head-of-Household vs. Joint Filing

In 2011, A had a baby and filed a Form 1040 using head-of-household status. B started the process to adopt the baby. The majority of B’s income was from unemployment insurance benefits of $32,500. A had wages of $38,200. A was able to take a Sec. 21 child and dependent care credit and a Sec. 24 child tax credit for her new baby since she was working. If they amend their returns, the child care credit disappears because B does not have any earned income and both spouses must have earned income to claim the credit. In addition, A loses the standard deduction of $8,500 that is available for a head of household, which is partially offset by a state income tax deduction of $1,665 on the joint return. The tax would increase more than $1,820 by filing an amended return as married filing jointly (see Exhibit 2).

2012: Head-of-Household and Single vs. Joint Filing

In 2012, B finalized the adoption of A’s baby, claimed an adoption credit, and claimed the baby as a dependent on her return. B had self-employment income that year and no wages. A filed using single filing status and took the standard deduction of $5,950. When filing jointly, A loses the benefit of the standard deduction, although this is offset somewhat by an increase of $950 to the state income tax deduction. B loses the adoption credit because a married same-sex couple cannot take an adoption credit when one spouse legally adopts the other spouse’s baby.6 This year, filing as married filing jointly results in a tax increase of over $1,200 (see Exhibit 3).

The facts above include examples of the personal circumstances that commonly affect married couples and the resulting tax effects. The option to file an amended joint return opens a range of possibilities but still requires careful analysis. The ability to itemize deductions needs to exceed the loss of the standard deduction. The loss of tax credits for children also needs to be carefully examined. For the 2014 tax ­filing season, filing as single taxpayers for federal income tax purposes is no longer permitted for married same-sex couples. Extensive analysis must be completed before amending prior-year returns to be sure it will yield the best tax results.

Footnotes

¹ Defense of Marriage Act, P.L. 104-199.

² Massachusetts became the first state to recognize same-sex marriage through a decision of the Massachusetts Supreme Judicial Court finding the state’s law prohibiting same-sex marriage unconstitutional (Goodridge v. Department of Public Health, 798 N.E.2d 941 (Mass. 2003)).

³ Santos, “New Mexico Becomes 17th State to Allow Gay Marriage,” The New York Times, Dec. 19, 2013.

⁴ Windsor, 133 S. Ct. 2675 (2013).

⁵ No state filing issues are addressed, however.

⁶ IRS, “Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law.”