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Same-sex marriage and tax status

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By Becky Saylor, tax senior I, LGT

Celebrating a new marriage means, that come tax season, individuals will also be welcoming a new filing status — unromantic as that may be. The June Supreme Court decision in Obergefell v. Hodges has sweeping social, legal and state tax implications for same-sex marriage, while its effect on federal tax law is minor. The 2013 ruling of U.S. v. Windsor legislated the beginning of federal recognition of same-sex marriage.

Same-sex spouses are now both able and required to file tax returns as married, while they previously had only the option to file as single. Now, as with all married couples, same-sex spouses must file as either married filing jointly (MFJ) or married filing separately (MFS) — married couples may not choose to file as single. If a same-sex couple was legally married prior to this ruling and previously filed returns as single, they now have the option (but are not required) to file amended tax returns for all years legally married. Depending on when the original return was filed, tax years as far back as 2011 could be amended. This ruling requires same-sex couples to have a valid marriage certificate; however, this does not apply to those in a registered domestic partnership or civil union.

Why does filing status matter?

Combining income and expenses with a partner and sharing income and deduction thresholds could provide a tax benefit to couples filing as married that would not be available if the couple filed two single returns. However, depending on each person’s portion of the tax items, the same issue could provide a detriment to the couple. For example, when MFS, both individuals must itemize deductions or both must take the standard deduction. This could be an overall loss in tax benefit if each individual, filing as single, would derive more benefit from taking a different deduction than his or her counterpart.

Same-sex couples are also subject to community property rules in the states that have them, including Texas. For tax purposes, the main implication of this is that the income and expense generated by one spouse is considered owned 50 percent by the other spouse. This primarily comes into play when spouses are married filing separately.

In the realm of estate and gift tax, there are dollar limits on how much an individual can give to another without incurring a tax liability. However, an unlimited number of gifts, be they cash, property, or other assets, may be given to one’s spouse during life or at death without incurring estate or gift tax liability, a benefit not previously available to same-sex spouses.

As for the tax implications of Obergefell v. Hodges, this decision requires all states to issue to and recognize marriage licenses to same-sex couples. This means that same-sex spouses will be able to file as married on state tax returns, as well. In Texas, most avoid the hassle of filing state income tax returns, but for those living outside of Texas or receiving income from out of state, this may be relevant. In those cases, same-sex couples will be able to file jointly on both federal and state tax returns, and will find the state tax filing process simpler than in previous years.

Tax issues are the least of the implications of Obergefell v. Hodges and related legislation. However, navigating the nuances of the tax code is often difficult and is inevitable for everyone, regardless of filing or marital status. This is simply an overview of some of the tax areas and considerations that same-sex couples can, and must, now include in their tax planning.