In 2013, the U.S. government provided recognition to same-sex couples as ‘married’ at the federal level. This allowed them to file their federal tax returns as ‘Married filing Jointly’ instead of ‘Single’ qualifying them for the more favorable Joint tax bracket as well as various employer group benefits (For details read: Same-sex couples to be treated as married for US Federal Tax & other benefits). However, this did not improve the situation for all same-sex couples as there remained several states which still had not recognized same-sex couples as married, requiring them to file their state returns as ‘Single’.
On 26th June, 2015, the Supreme Court gave its verdict in the Obergefell vs. Hodges, Director, Ohio Department of Health, making it mandatory for all 50 U.S. states to legalize same-sex marriage, clarifying the tax situation for same-sex couples in those states that had not recognized same-sex married couples. As a result of this change in law, the IRS has introduced its updated definition of ‘husband’ and ‘wife’, and the laws that would now apply to same-sex couples the same as opposite-sex couples.
Here is a brief overview of the updated definition of husband and wife by the IRS.
Obergefell Vs Hodges Case Background
In this case, Obergefell had challenged Hodges, the Director of the Health Department in the state of Ohio which did not recognize same-sex couples as married. The case is a combination of six lower court cases of same-sex couples that was presented in front of the Supreme Court. On June 26th, 2015 the Supreme Court gave it’s decision (5-4) that all U.S. states would need to legalize same-sex marriage and issue a valid marriage license to same-sex couples.
IRS Redefinition of Husband & Wife for U.S. Tax Purposes
As per the IRS, for federal tax purposes, the terms: spouse, husband, and wife mean an individual lawfully married to another individual irrespective of gender. A marriage of two individuals is recognized for federal tax purposes if the marriage would be recognized by any state, possession, or territory of the United States.
Post Obergefell
The IRS recently published proposed regulations that redefine the way the Code dictates the marital status of taxpayers for purposes of the income, estate, gift, excise, and payroll taxes, providing legally married same-sex couples the same status as opposite-sex couples.
It is to be noted that these regulations are for only legally qualifying marriages and not registered domestic partnerships, civil unions, or other forms of relationships.
Tax Situation for Same-Sex Couples Now
Even before the decision on same sex marriage was made by the Supreme Court, some couples opted to choose “civil union”, even though the option of marriage was available, to avoid losing out on Social Security benefits from a previous marriage or to avoid the so-called “marriage penalty”. Under the current tax law, the IRS has made it compulsory for legally married same-sex couples to file either as married filing jointly or separately but not as single. This law comes with certain drawback, which couples should now be aware of:
- Higher joint tax brackets: For example, in 2015, a taxpayer filing ‘Single’ with income above $189,300 will be subject to a tax rate of 33% while a married couple would be subject to the same at income above $230,450 for ‘Married filing Jointly, an extra of only $41,150 from the amount applicable for ‘Single’ taxpayers. Filing as ‘Married filing Separate’ would not make much difference either since in this case, each person may claim $115,225 on their return (i.e. half of $230,450).
- Marriage penalty: is so called, because two single filers can sometimes double up on certain favorable tax exemptions when compared to their married counterparts. For example, taxpayers currently may deduct the interest on up to $1,000,000 of home acquisition debt and an extra $100,000 of home equity debt, so two unmarried individuals can separately deduct the interest on $1,100,000 of the debt on a house they co-owned but in the case of married couple taxpayers they are only allowed to jointly deduct $1,100,000.
Although same-sex couples have the same legal married status as opposite-sex couples in all 50 states, the tax law also subjects them to various potential downsides associated filings as Married Filing Jointly. As always it is highly recommended to consult a good tax practitioner for proper tax planning, and measures to minimize their tax burden.
AG TAX LLP Can Help
If you wish to consult regarding this or any other tax rules, or have any other tax-related queries, and/or need assistance/help with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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