Federal Agencies Issue Guidance that Valid Same Sex Marriages Recognized for All Federal Tax Purposes
On August 29, 2013, the Treasury Department and the Internal Revenue Service issued a public announcement and released Revenue Ruling 2013-17 wherein it answered a number of open questions concerning the impact of the U.S. Supreme Court Decision, United States v. Windsor. This is the case that overturned the federal Defense Of Marriage Act (DOMA). Specifically, the government ruled that for purposes of federal tax law, marital status will be based on the laws of the state where the marriage is initially established (the “state of celebration rule”), not the state of residency.
Prior to the government’s issuance of Revenue Ruling 2013-17, there was a question as to whether a same sex married couple lawfully married in a state such as Minnesota, would lose the rights and privileges of their marital status if they moved to a state that does not recognize same sex marriage – i.e., Florida or Wisconsin. The Revenue Ruling removes any question as to how the government will treat such couples under the following tax provisions:
- Filing Status
- Personal Dependent Exemptions
- Standard Deductions
- Pensions (surviving spouse, joint and survivor annuities QDROS)
- IRA Contributions
- Earned Income Tax Credits
- Child Tax Credits
- Estate and Gift Tax Exemptions
- Health and Life Insurance Taxation
The rationale for the government’s ruling was explained as two-fold. First, the Ruling is consistent with Revenue Ruling 58-66 in which the IRS determined that individuals who entered into a common law marriage in a state that recognized such marriage could be considered to be as married even if the couple moved to a state which did not recognize common law marriage. Secondly, the IRS cited efficient tax administration. In the Ruling, the government states: “Although states have different rules of marriage recognition, uniform nationwide rules are essential for efficient and fair tax administration. A rule under which a couple’s marital status could change simply by moving from one state to another state would be prohibitively difficult and costly for the Service to administer, and for many taxpayers to apply.”
Implications for Employers
Employers should adopt a uniform federal definition of “Spouse” and “Dependent” for purposes of federally regulated benefit plans, including pensions and 401(k) plans. Formal plan amendments likely will be required. Employers that already permit domestic partners to participate in group health plans should cease withholding income taxes on the employed spouse but only if the couple is legally married for federal tax purposes. The rules are more complicated for health and welfare and cafeteria plans which do not require spousal coverage at all, but plan amendments may be necessary for such plans depending on the funding status (insured or self-funded) and plan treatment of same sex couples.
Impact on Individual Taxpayers
Married taxpayers who were taxed on benefits as if they were unmarried are eligible to file for tax refund claims on IRS Form 1040X. Refunds for gift or estate taxes can be claimed on IRS Form 843.
The Ruling also clarified that the federal tax treatment does not change for registered domestic partnerships, civil unions or other formal relationships recognized under state law that are not in fact lawful marriages. The Ruling is effective September 16, 2013. The IRS will be issuing further guidance on how plan administrators are to handle these issues for pensions and cafeteria plans for periods before the effective date.
Labor weighs in
On September 18, 2013, the U. S. Department of Labor, Employee Benefits Security Administration (EBSA) issued Technical Release No. 2013-4 to employee benefit plan administrators and plan sponsors, directing them to follow the same “state of celebration” rule as the IRS, for purposes of Title I of ERISA regulated benefit plans.
The states that currently allow same sex marriages include: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington and District of Columbia.