State tax labyrinth awaits same-sex couples

Uneven recognition of same-sex marriage will make for a complicated tax year

Jan 16, 2014 @ 12:38 pm

By Darla Mercado

An intimidating patchwork of state laws awaits financial advisers and accountants who are preparing their same-sex married clients for the impending tax season.

Last year's Supreme Court decision in United States v. Windsor signified the federal government's recognition of same-sex marriages. One of the major benefits of the outcome is the fact that married gay couples can file federal returns jointly, provided they got hitched in a state that recognizes the marriage.

“The tax code benefits married couples in many ways: the pooling of income, greater deductions and assigning dependents to both partners rather than one,” said Joseph Henchman, vice president of legal and state projects at the Tax Foundation. “For those who live in states that recognize it, married couples can file jointly at the federal and state level, so there's less paperwork for them and hopefully some financial advantages.”

Still, there's a daunting task ahead of advisers: This year's tax rules will be entirely different for this filing season versus previous seasons, and tax professionals will need to determine how differences in state law and recognition of marriage will affect their clients. For those with clients in states that don't recognize same-sex marriage, there still will be plenty of paperwork.

A recent paper from the Tax Foundation reveals that there are 22 states that don't recognize same-sex marriage while requiring taxpayers to reference their federal return when they file for state income taxes.

Indeed, Arizona, Kansas, North Dakota, Ohio and Wisconsin tell same-sex couples to split their income on two single returns based on a state-provided schedule, according to the Tax Foundation.

In Georgia, Idaho, Indiana, Kentucky, Louisiana, Michigan, Nebraska, North Carolina, Oklahoma, South Carolina, Virginia and West Virginia, same-sex taxpayers will need to complete “dummy” federal single tax returns and use that information to calculate their state tax liability. Dummy federal returns are not sent to the federal government, but only used for state-level tax calculations.

In Colorado, Missouri and Oregon, same-sex taxpayers can file jointly. Meanwhile, Alabama tells same-sex filers to divide their income according to a ratio. Finally, Montana will advise gay couples not to file jointly, but the state does not verify taxpayers' marital status, according to the Tax Foundation.

Advisers who work with same-sex couples — particularly those who live in states that don't recognize gay marriages — are grappling with a litany of tax issues as April draws nearer. There's the matter of tracking exactly how states view the marriages in the context of income tax laws, but also whether it makes sense to amend past federal returns.

Scott E. Squillace, founder of Squillace & Associates PC, noted that he has spent many hours taking stock of his gay clients' tax situations.

“The IRS has taken the position that it will allow people to amend their income, estate and gift tax returns for the last three years, so you better run the numbers and see if you're in a better or worse position if you're married to file the amendment [to your past returns],” he said.

Clients need to figure out whether filing an amendment as a married couple would put them in a higher bracket and whether they may be due for refunds or face higher liabilities in the form of the marriage penalty, Mr. Squillace added.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

What's the first thing advisers should do when they get home from a conference?

After attending a financial services conference, advisers can be overwhelmed by options, choices and tools. What's the first thing they should do when they get back to their office?

Latest news & opinion

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Whistleblower said to collect $30 million in JPMorgan case

The bank did not properly disclose that it was steering asset-management customers into investments that would be profitable for JPMorgan Chase.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print