Same-Sex Couples: A Lack of Conformity in State Tax Filing Status
March 25, 2014
Please note: A version of this article appears in the May issue of the Journal of Multistate Taxation and Incentives.
On June 26, 2013, in U.S. v. Windsor, the U.S. Supreme Court found section 3 of the Defense of Marriage Act (DOMA) to be unconstitutional. That section of DOMA had defined marriage, for all federal government purposes, as a union of one man and one woman and had defined spouse as a person of the opposite sex. As a result of this decision, same sex marriages are now recognized by the federal government. The good news is that, in the wake of the Windsor decision, the Treasury Department and the IRS have ruled that legally married same-sex couples will be treated as married for federal tax purposes, regardless of whether or not they currently reside in a jurisdiction that recognizes same-sex marriages.
While the demise of section 3 of DOMA was a turning point for same-sex couples, other issues still exist that continue to provide challenges and inconsistencies in the tax treatment of same-sex couples. For example, the Supreme Court did not rule on the constitutionality of section 2 of DOMA. That section continues to provide that states are not required to recognize same-sex marriages performed in any other jurisdiction. In addition, the Windsor decision – and the IRS guidance – is only applicable to marriages, and not to civil unions or registered domestic partnerships.
Patchwork of State Laws
Currently, 17 states and the District of Columbia have legalized same-sex marriages, 4 states recognize same-sex civil unions or domestic partnerships, and 29 states have banned same-sex marriage by statute or constitutional provisions. Since the Windsor decision, federal district courts have overturned same-sex marriage bans in 5 states – Utah, Oklahoma, Virginia, Kentucky, and Texas – as of this writing, and additional decisions are forthcoming.
This conflict of laws between the states and the federal government has created a contentious environment over tax return filing status. The issue is further exacerbated by the fact that nearly all jurisdictions use a federal income tax-based calculation of income as a starting point for state tax computations. Six states specifically start their state tax returns with federal taxable income. An additional thirty states, plus the District of Columbia, begin with the taxpayer’s federal adjusted gross income. In other words, only five states that levy a state income tax do not reference the federal definition of income.
Specific State Return Requirements
Same sex marriage is now the law of the land in 17 States and the District of Columbia. Married couples in these states are treated identically no matter the gender of the spouses. These states are as follows: Massachusetts, Maine, Vermont, New Hampshire, Connecticut, Rhode Island, New York, New Jersey, Delaware, Maryland, Illinois, Iowa, Minnesota, Washington, California, Hawaii and New Mexico.
Based on state statutes and constitutions, many jurisdictions still do not allow same-sex couples the convenience and advantages of filing a joint return at the state level. As a result, these couples – and their tax advisors – are require to prepare multiple federal returns: one joint return to be filed with the IRS, with additional federal returns – prepared as single-filers – to be used in the preparation of their state tax returns. The actual tax due with single returns may be higher or lower than the tax due on a joint return, depending on each taxpayer’s specific facts and circumstances.
One dozen states are requiring same-sex couples to prepare a pro-forma or “dummy” federal return as two single individuals (or if qualified one head of household and one single individual) and attach it to their state return. These states include: Georgia, Idaho, Indiana, Kentucky, Louisiana, Michigan, Nebraska, North Carolina, Oklahoma, South Carolina, Virginia, and West Virginia.
Five other states have created a new state-specific form requiring same sex couples to allocate their federal joint income to two single returns. These states include: Arizona, Kansas, North Dakota, Ohio and Wisconsin. Alabama instructs same-sex taxpayers to apportion their income according to ratio. Finally, Montana advises same-sex taxpayers not to file jointly, but concedes it has no way of verifying the information.
However, there are now four states – Colorado, Missouri, Oregon and Utah – allowing same-sex taxpayers to file taxes jointly, even though same-sex marriage has not been legalized in their particular state. Utah joined this list based on a notice issued January 15, 2014, stating that same-sex couples who are eligible to file a joint federal income tax return and who elect to file jointly, may also file a joint 2013 Utah Individual Income Tax return, as provided under Utah law, so long as they were married as of the close of the tax year.
The following states do not assess individual income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Additionally, in Tennessee, there is only a flat-rate tax on interest and dividends, which filing status has no impact upon. Therefore, the non-recognition of same-sex marriage is not a tax issue in any of these states – for residents or non-residents.
Civil Union Issues
For those couples who entered into civil unions, many states have granted automatic conversions into marriage. Therefore, if the civil union is converted into marriage, then the couple is treated as married and may file jointly for federal filing purposes. However, unless the civil union was converted to a marriage in 2013, the couple would not be considered married for federal filing purposes. Despite the lack of federal acknowledgement, several states do allow joint tax filing for state-recognized civil unions, even for non-residents. Currently, the only states still granting civil unions are Colorado, Illinois and Hawaii.
Under Vermont law, couples in civil unions are now treated as married under Vermont law and civil unions are no longer granted in the state. Similarly, in Connecticut, as of October 1, 2010, couples can no longer enter into civil unions. And all civil unions that had been performed in Connecticut were converted to, or are now recognized as, a marriage, unless proceedings for dissolution, annulment or legal separation have been initiated. In New Hampshire, all civil unions were merged into marriage no later than January of 2011, unless annulled or dissolved. In Delaware, on July 1, 2014, all existing Delaware civil unions will automatically convert to marriages. However, between July 1, 2013 and July 1, 2014, those couples wishing to convert a civil union to a marriage without a ceremony will apply for a marriage certificate, while those converting with a ceremony will apply for a marriage license.
The Road Forward
The Supreme Court victory in Windsor and the IRS interpretation are major steps ahead for same-sex marriages but income taxation involves state, as well as federal, laws. For the time being, same-sex couples face a striking lack of conformity in their filing status under current state tax regimes. Same-sex couples and their tax advisors must be prepared to do extra work, and to keep up with new changes, before they enjoy the same protections as other couples.
For a map of states and their status re: accepting joint returns, please click here.