10 Same-sex Marriage Tax Filing Tips

Now that the U.S. federal government recognizes same-sex marriages as legal, tax time is changing for many couples. CREATISTA/iStockphoto/ThinkStock

For many people in the U.S., taxes have never been so exciting. Recent historic changes to federal regulations have opened up a whole new category of tax benefits to same-sex couples. In 2013, the U.S. Supreme Court decided to strike down a portion of the Defense of Marriage Act (DOMA), a decision that led the federal government and the Internal Revenue Service to recognize same-sex couples who are legally married.

The move gives couples in same-sex marriages the same federal tax benefits as couples in heterosexual marriages, such as standard deductions, employee benefits, filing status, personal and dependent exemptions, and credits like the Earned Income Tax Credit and Child Tax Credit. Overall, this could mean a reduction in the amount of taxes owed by legally married same-sex couples.

How does that play into federal taxes? If you have been legally married in a U.S. state or foreign country that recognizes same-sex marriage, the federal government recognized your marriage for federal tax purposes — no matter where you live in the U.S. [source: Barnes].

10
Understand the 'Place of Celebration' Rule
For the federal government to recognize your marriage, it has to have been performed somewhere it was legally recognized. Here, Marcia Kadish (left) and Tanya McCloskey become the first same-sex couple to be married in Cambridge, Massachusetts. Photo by Dina Rudick/The Boston Globe via Getty Images

If you're not already familiar with the term "Place of Celebration," then you probably will be soon. The Place of Celebration refers to an IRS rule that recognizes same-sex unions for federal tax purposes.

Basically, the Place of Celebration rule means same-sex marriages will be recognized by the U.S. Treasury Department and the IRS if the union was legal where it was officiated or "celebrated." Importantly, the Place of Celebration rule allows same-sex marriages that fall under these guidelines to be recognized all over the United States, whether or not the couple lives in a state where same-sex marriage is legal. In effect, it makes a legally married same-sex couple's federal filing status immutable no matter where they live — or relocate to — in the U.S.

The Place of Celebration rule applies to any same-sex marriage legally performed in any of the 50 states of the United States (in which it is allowed by law), the District of Columbia, a U.S. territory or a foreign country, but does not apply to domestic partnerships or civil unions. The ruling is important at tax time because, for the first time, legally married same-sex couples are afforded access to the same deductions and credits as heterosexual couples [source: U.S. Department of Treasury].

9
Consider Claiming a Dependent
Your tax filing can change significantly if you add a dependent. BananaStock/ThinkStock

Beginning in 2013, same-sex married couples can file jointly and claim their dependents, just as heterosexual married couples have been able to do for years. Being able to claim a dependent can make a big difference on a couple's federal income tax bill. For starters, it reduces the amount of taxable income and the overall tax liability. In tax year 2015, for example, simply claiming a qualified dependent on your federal income taxes will gain same-sex married couples filing jointly an exemption up to $4,000.

According to the IRS, a dependent is someone for whom you provide support who is either under the age of 19 or who is a full-time student up to age 24. During the tax year, you'll need to have provided more than half the support to this child, who also needs to have lived with you for a significant period. Qualifying dependents include your child, a sibling, stepsibling or another relative. Foster children also are eligible. Keep in mind that if a same-sex couple decides to go the married filing separately route, only one can claim the child [sources: Cussen, Morah].

8
Check Your Tax Filing Status
Before you start, make sure you're on the same page about whether you're filing jointly or separately. KATARZYNA ZWOLSKA/iStockphoto/ThinkStock

All legally married same-sex couples are required to file their federal income tax returns using one of two filing statuses: married filing jointly or married filing separately.

Before this happens, though, it will be important to understand marriage criteria in the eyes of the IRS. A same-sex couple is considered married if they were joined in a legal union on or before the last day of the tax year. For example, a same-sex couple married on Dec. 31, 2014, in a state that recognizes same-sex marriages, will need to file a joint return for the 2014 tax year.

It's also important to compare the benefits of married filing jointly versus married filing separately. In general, married filing jointly offers greater tax benefits, but there are some instances in which spouses will want to file as married filing separately, such as when a spouse's refund will be taken by the government.

Married filing separately status also limits deductions and credits that would otherwise be available under a married filing jointly status. These limitations include the inability to deduct student loan interest, tuition or fees, and the inability to claim a Child and Dependent Care Credit or Earned Income Credit.

In addition, when spouses enter a married filing separately status, both must make the same deductions — either by claiming the standard deduction or by itemizing their deductions [source: Wicker].

7
Beware the Marriage Penalty
Newlywed couples can experience sticker shock over more than just the price of the tuxes (and everything else in the ceremony). Your combined income may put you in a new tax bracket. govicinity/iStockphoto/ThinkStock

A Supreme Court decision that resulted in federal recognition of same-sex couples ushered in a new era of tax advantages and, for the first time, required legally married same-sex couples to file federal income taxes as married.

The requirement for married same-sex couples to file federal taxes together was an about-face from previous years; previously, these same couples were required to file federal taxes separately. This was the case even if same-sex couples were legally married according to state law.

This federal equality for married same-sex couples was, for many, a leap ahead. However, it also made them vulnerable to a costly tax situation known as the "marriage penalty."

For some, this caused some "sticker shock" because it also meant paying significantly higher taxes. The combined incomes of a same-sex couple filing as married often placed them in a higher tax bracket. For example, a couple that earned a combined $150,000 a year would be taxed at 28 percent, when just a year earlier they had filed singly and were taxed in the 25 percent bracket [source: Lavery].

There's not really a way around the increase in taxes that sometimes comes with filing as married, but a variety of other tax breaks may help offset the cost.

6
Don't Get Double-taxed for Premiums
If your employer's health insurance plan covers your spouse, make sure your premiums are being withheld before taxes, now that your marriage is legally recognized. Elena Shchipkova/iStockphoto/ThinkStock

If you're a same-sex married couple, you may be able to take advantage of health insurance benefits at tax time, and all year long.

According to the IRS, beginning with taxes filed in 2014, spousal health insurance benefits may be excluded from income. This also means health insurance benefits may receive pretax treatment, a move that could save hundreds — if not thousands — of dollars a year.

Previously, a same-sex couple (even if they were married in certain states) were considered by the federal government to be in a domestic partnership, a move that cost a same-sex couple an average of $1,069 more per year in taxes. The increased tax cost occurred because when one spouse received benefits through the other spouse's employer-sponsored health plan, it was purchased by after-tax dollars. In short, the benefits were treated as income and were therefore subject to federal tax. In addition, pretax dollars couldn't be used to pay for coverage of the non-employed spouse.

Now that the federal government recognizes same sex marriages, spousal health insurance benefits are eligible for pretax treatment and income exclusion. In general, you can file amended returns for the past three years to recover income taxes paid on premiums [sources: Human Rights Campaign, MacDonald, IRS].

In the next section, you can learn more about filing amended returns.

5
Amend Past Year Returns
If you were legally married before the federal government recognized your marriage, you may want to file amended federal tax returns for those in-between years. pkstock/iStockphoto/ThinkStock

Married same-sex couples may want to consider amending previous years' tax returns if it will be financially beneficial — and it certainly could be, given the recent requirement to file joint tax returns.

In general, any taxpayer can amend past federal tax returns going back three years. For same-sex married couples, this might be particularly advantageous now that they may file as married. For example, it could net a refund for couples that previously paid after-tax health insurance premiums or who missed out on other tax deductions or credits, like the Earned Income Tax Credit.

For example, a same sex couple legally married before 2009 — but unable to file as married because of federal tax limitations — may want to consider filing an amended return for tax years 2010, 2011 and 2012, enabling them to receive any refunds that may now be owed to them.

While you aren't required to amend your returns, you may want to recalculate them to see if doing so will offer a refund or other tax advantages. Generally, if one spouse was the primary earner, filing an amended return will work in your favor [source: Lankford].

4
Know Your Gift and Estate Exemptions
Since the U.S. government now recognizes same-sex marriage, gift and estate rules apply to same-sex marriages as well. Jupiterimages/Stockbyte/ThinkStock

When it comes to filing your taxes, be sure you aren't overpaying on gift and estate tax. As of 2013, legally married same-sex couples can make monetary gifts to a spouse or a leave a spouse an estate without paying a gift or estate tax. Previously, married same-sex couples were not granted these exemptions.

Keep in mind that there is not a limit on how much money you can give your spouse. This is known as a lifetime marital deduction. However, you may need to pay taxes — or invoke limits — on the amount you gift to other people.

In 2015, the annual gift exemption limit was $14,000. Any amount given over the $14,000 in a single calendar year will require you to pay a gift tax on it. In addition, you'll need to file a gift tax return (Form 709), whether you exceeded the limit or not. That way, the IRS can keep track of the gifts you are bestowing on others.

Although you can give an unlimited amount in your lifetime to your spouse, including passing an estate to your spouse, your other gifts will go toward a lifetime exemption limit of $5.43 million [source: TurboTax].

3
Understand the Tax Implications of Divorce
It's probably far from the minds of those newly, legally wed, but divorce has tax consequences, too. Jeffrey Hamilton/Digital Vision/ThinkStock

Legally married same-sex married couples sometimes divorce, and this can exact a number of complications onto your tax preparation. For starters, even if you are living apart, you will still be considered married on the last day of the year if there isn't a legal decree of divorce or separate maintenance in place.

When it comes to filing a federal tax return, however, it pays to look at all your options. First, you could opt to file as married filing jointly, just as you normally would. For the most part, this allows you to pay fewer taxes and claim the most credits and deductions. Sometimes, however, even the thought of saving money isn't enough to salvage a contentious disentanglement.

If the divorce is becoming acrimonious, it may make sense to file federal taxes as married filing separately. Although this will probably mean you pay more taxes in the end, you'll also be offered some protections from your spouse (and any potential wrongdoing on that person's tax return) if you file separately. Plus, you'll now be able to deduct alimony payments [source: Wicker].

If you are legally separated, you may choose married filing separately or, if you have at least one dependent, you may elect to use a head of household filing status [source: Cussen].

2
Check Out Child Tax Credits
Non-biological or non-adoptive parents now have easier access to child tax credits on their federal taxes. Creatas/ThinkStock

Beginning in 2013, claiming a Child Tax Credit became a little simpler for married same-sex couples. Previously, it was difficult — if not impossible — for one partner to claim Child Tax Credit or Earned Income Credit on the other partner's child, even if they were both raising the child together. The non-biological or non-adoptive parent struggled to establish a legal connection to a child that wasn't his or her biological or adopted child.

For example, Maria works full-time and provides nearly all the support for her wife Linda's biological child, Corbin. Because Maria is unable to prove a legal tie to Corbin, she cannot claim him as a dependent. Likewise, she cannot claim a Child Tax Credit or Earned Income Tax Credit. Because she cannot claim these credits, her wife Linda needed to file federal income taxes to do so.

Now that the federal government recognizes same-sex marriage, it no longer hampers a married same-sex couple's ability to get these tax credits. They are able to file jointly, just as any other married couple [source: Bernard].

1
Capitalize on Capital Gains
If you sell your home, you'll have a much higher threshold on capital gains tax if you file jointly. Feverpitched/TiStockphoto/ThinkStock

Married same-sex couples, get ready for some capital gains good news. Now that you can file taxes jointly because the federal government recognizes your union, you also can experience the benefits of larger capital gain exclusion. Before 2013, when you were considered by the federal government to be single — even if you were legally married in a state that recognized same-sex unions — if you sold your principal residence, you didn't have to pay federal income tax on gains up to $250,000. However, now that you are married and filing jointly, you can exclude up to $500,000 of capital gains. You won't need to pay a bit of federal taxes until those gains reach $500,001.

Another benefit of being able to file jointly as a same-sex married couple is balance — at least when it comes to capital gains and losses. For example, if Jim experiences a significant capital gain in a tax year by selling his dry cleaning franchise, these gains are offset to the extent that his husband, George, shuttered the costume emporium he owned at a loss [source: Bischoff].

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Author's Note: 10 Same-sex Marriage Tax Filing Tips

Following federal tax code is complicated enough, but for many years same-sex couples have been filing separate returns and often incurring additional costs along the way. The ability for a married couple to file a single tax return simplifies not only the process, but makes a greater variety of credits and exemptions available, too.

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Sources

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