New Tax Rules for Legally Married Same-sex Couples
The U.S. Supreme Court’s decision in the Edith Windsor Case, invalidating a key provision of the Defense of Marriage Act, raised many questions regarding the federal income tax rights and responsibilities of same-sex couples. The U.S. Department of the Treasury and the IRS recently ruled that same-sex couples, legally married in a jurisdiction that recognizes their marriages, will be treated as married for federal tax purposes. This ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.
Same-sex couples will now be treated as married for all federal tax purposes (income, gift, and estate taxes) where marriage is a factor. The ruling applies to filing status, personal and dependency exemptions, the standard deduction, employee benefits, IRA contributions, and the earned income and child tax credits.
For 2013, legally married same-sex couples must file their tax return using either the married filing jointly or married filing separately filing status. For years prior to 2013, these couples may, but are not required to, file amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.
Employment Tax Withholding–Refunds and Adjustments for Same-sex Married Couples
Federal income and employment tax rules provide exclusions from gross income and from wages for specific benefits employers provide to the spouse of an employee. Prior to the Windsor decision, married same-sex taxpayers were excluded from receiving the benefit of these provisions. As a result, employers withheld and paid employment taxes on certain benefits provided to the same-sex spouse of an employee because (1) the marriage was not recognized and (2) the benefits were not treated as excludable from gross income or from wages for federal income or employment tax purposes.
Following the Supreme Court’s decision in Windsor, the IRS provided guidance to employers and employees on how to make claims for refunds or adjustments (corrections) of overpaid payroll taxes. Specifically, taxpayers who overpaid FICA (Social Security and Medicare) taxes and federal income tax withholding for certain benefits provided and remuneration paid to same-sex spouses may now be entitled to a refund of or an adjustment to their withholding.
The IRS has provided two alternative procedures for employers to correct the overpayment of employment taxes attributable to same-sex spousal benefits.
- An employer can repay its employees for the over-collected FICA and federal income tax withholding with respect to same-sex spousal benefits for the first three quarters of 2013 during the fourth quarter of 2013. The employer will then reduce fourth quarter wages, tips, and other compensation on its fourth quarter Form 941.
- An employer that does not reimburse the employee’s over-withholding by December 31, 2013, can file one Form 941-X for the fourth quarter of 2013 to correct FICA taxes paid in all four quarters of 2013. This procedure will correct overpayments of FICA taxes for same-sex spouse benefits paid in 2013. The employer does not correct for over-withheld income taxes; instead, the employees will receive credit for the over-withheld income taxes when they file their 2013 federal income tax return.
The IRS has also provided a special administrative procedure for employers to make adjustments or claims for overpayments during years before 2013 still open under the statute of limitations (2010, 2011, and 2012). For these years, an employer can file one Form 941-X for the fourth quarter of each open year. This fourth quarter Form 941-X would include adjustments or refunds of all overpayments of FICA (but not income) taxes with respect to same-sex spousal benefits provided during that entire year.
These refund and adjustment procedures are complex. Please contact us if you have questions about these provisions or any other tax compliance or planning issues.