State tax labyrinth awaits same-sex couples

Uneven recognition of same-sex marriage will make for a complicated tax year
NOV 20, 2013
An intimidating patchwork of state laws awaits same-sex married couples who are preparing 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: 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 investors 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 between 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. Same-sex couples 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. Investors 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.

Latest News

Trump to name new Fed governor, jobs data head in coming days
Trump to name new Fed governor, jobs data head in coming days

President says he has a ‘couple of people in mind’ for central bank role.

JPMorgan’s asset management arm targets Europe retail investors in active ETF tie-up
JPMorgan’s asset management arm targets Europe retail investors in active ETF tie-up

Wall Street firm partners with Dutch online broker to fuel push into EU market.

UBS to settle outstanding Credit Suisse RMBS case with $300M payment
UBS to settle outstanding Credit Suisse RMBS case with $300M payment

Agreement with the US Department of Justice comes eight years after settlement.

GeoWealth secures $38M in funding round led by major alternative investment manager
GeoWealth secures $38M in funding round led by major alternative investment manager

Series C funding will accelerate unification of TAMP’s model portfolios.

No succession plan? No worries. Just practice in place
No succession plan? No worries. Just practice in place

While industry statistics pointing to a succession crisis can cause alarm, advisor-owners should be free to consider a middle path between staying solo and catching the surging wave of M&A.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.