Unclear how couples report income from states not recognizing same-sex marriage
WASHINGTON (Reuters) — Married Californians Jeremy Turpen and Randy Brock celebrated last month's U.S. Supreme Court rulings on gay marriage. Now they face a tax headache.
Living in a state that recognizes gay marriage, they are entitled under the rulings to federal tax breaks enjoyed by other U.S. married couples such as tax-free, employer-provided healthcare for a spouse.
But still unclear is how they are to report the business income Brock gets from Florida, where same-sex marriage is not recognized.
For both the tax-collecting Internal Revenue Service and America's accountants, the answer is far from simple.
"I could talk to three different CPAs and get three different answers," said Turpen, who lives with Brock in Capitola. "That's not equality under the law from a financial perspective," he said.
The high court ruled in June that the federal government must recognize same-sex marriages that are legal in 13 states and the District of Columbia for the purpose of federal taxes, granting them a range of tax benefits for healthcare, retirement plans and a surviving spouse.
But the court also ruled states can go on setting their own policies on gay marriage.
This raises questions for the IRS about the 114,000 legally married same-sex couples across the country such as Turpen and Brock.
Of those, about 38,000 live in the other states that do not allow or recognize same-sex marriages, according to the Williams Institute, an arm of the University of California at Los Angeles School of Law. How is the IRS to manage that?
Turpen and Brock, who married in California in June 2008 and will be filing their first married federal tax returns for 2013, may not be entitled to federal tax benefits for their out-of-state income.
"You're a prisoner in your own state," said Cynthia Leachmoore, who runs Soquel Tax Service in California. "That's not freedom."
IRS defers to states
The IRS has historically deferred to states' definitions of marriage in many federal tax circumstances.
But if the IRS keeps the state residency policy, then people in the 37 states where gay marriage is not expressly endorsed "have gained virtually nothing by last month's decision", said Todd Solomon, a partner at law firm McDermott Will and Emery. "It's a huge issue."
If forced to reconsider the policy, the IRS could scrap the state residency deference and open federal tax benefits to legally married same-sex couples nationwide.
IRS chief Danny Werfel said this month the agency had no specific deadline for a ruling but hoped to publish rules as soon as possible. Speaking to tax practitioners, Werfel said the IRS needed to evaluate more than 200 tax code references to marriage based on the Supreme Court's decision.
An IRS spokesman confirmed Werfel's statements but said the IRS had no immediate comment on the Supreme Court's rulings.
An IRS ruling that reaffirms the court ruling that marriages are defined by states would deal a blow to gay rights, said Brian Moulton, an attorney with the Human Rights Campaign, a gay rights group which has lobbied the Obama administration to recognize marriages based on the ceremony rather than the state.
The IRS marriage rules are at odds with recent same-sex marriage guidance from the Obama administration announced in another context after the Supreme Court's decisions.
The U.S. Citizenship and Immigration Services said this month it would look at where the marriage took place to determine if it was valid for immigration purposes.
Gay rights advocates applauded that decision.
"We're hoping the IRS will follow suit," Moulton said.
Paycheque hurt
Currently, same-sex couples are unsure if they can exclude from federal income taxes any healthcare expenses covered by a spouse's employer. Businesses exclude healthcare expenses from employees' paycheques for heterosexual couples.
Businesses also need to know if pension or retirement benefits can automatically be transferred to a same-sex spouse if an employee dies.
Without an IRS ruling, "most companies are doing nothing right now, waiting for guidance," before changing their payroll systems, said Priscilla Ryan, a partner with law firm Sidley Austin LLP.
Same-sex couples will also be exposed to the tax code's "marriage penalty," which especially hurts married high-income married couples.
Same-sex couples also want to know if the IRS will allow them to amend old tax returns and seek refunds for the tax years when they could not file jointly.
There is a three-year statute of limitations for filing many amended individual returns, meaning that even if the IRS rules favourably for same-sex couples, a lingering delay could cost those couples in tax refunds.
These circumstances mean the IRS is under pressure to make these rulings soon, said Mark Steber, chief tax officer at tax preparation company Jackson Hewitt.
"I think you'll see something out in the next 30 days."
