A Milestone for Same-Sex Couples: Filing State Taxes as Married

Same-sex married couples face a new reality in the current tax season: They die and pay taxes just like everyone else.

Since the 2013 tax year, married same-sex couples have been required to file their federal returns as married, even if they lived in states that did not recognize gay marriage.

But many non-marriage states did not allow these couples to file as married on their state income tax returns, and instead required them to file as single or head of household.

That changed last year when the U.S. Supreme Court handed down its decision in Obergefell vs. Hodges on June 26, making marriage equality the law of the land.

"Now same-sex married couples are treated the same as other married couples in terms of both federal and state income taxes," Carol Calhoun, a benefits and tax attorney, said in a recent interview.

With Obergefell, same-sex couples who are married or plan to be must file both federal and state returns as married, whether jointly or separately.

"Domestic partners and those living together, however, must file as singles or heads of households," she said

In addition, Calhoun said, previously non-marriage states must allow same-sex married couples to file amended returns to obtain a refund if they think they overpaid their state income taxes, and if they wish to do so.

Professional Advice

This is one of several areas in which couples may want to seek professional advice, according to Calhoun, as each state has different requirements for requesting a refund, and some couples may have good reasons not to do so. Many couples, especially in previously non-marriage states, may need advice simply to get up to speed on filing income tax returns as married.

The differences among states regarding income tax prior to Obergefell can seem mindboggling. Before the decision was handed down, Calhoun conducted a study of states' stance toward same-sex marriage for state income tax purposes.

She found that eight states did not recognize same-sex marriage, but conformed to federal tax law: Georgia, Kentucky, Kansas, Louisiana, Missouri, Nebraska, North Dakota and Ohio.

Arkansas, Michigan and Mississippi banned same-sex marriage and did not conform to federal tax law. As a result, same-sex married couples had to file as single.

In Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, same-sex marriage was a nonissue either because these state had no income tax or because the state taxed only interest and dividends and did not provide a separate rate structure for single and married taxpayers.

The remaining states allowed same-sex marriage, and because of that, same-sex couples could file as married.

Calhoun said some same-sex couples may even seek counsel on whether to marry, and how doing so would affect their income tax. If they do marry, should they file separately or jointly?

For example, couples with widely disparate incomes would likely owe less income tax by filing jointly rather than as unmarried single taxpayers or as married filing separately.

But if both people in a relationship are high earners, it may be to their advantage to remain unmarried as they would owe more in taxes if they were wed.

A Wells Fargo study last summer showed that same-sex couples, whether married or not, had many other reasons besides tax issues to seek professional advice.

Employer Considerations

Obergefell also affects employers in previously non-gay-marriage states. Before the Supreme Court's decision, they had to determine state income tax withholding for employees in same-sex marriages/partnerships.

Not only that, in many instances, employers that had expanded spousal coverage for same-sex partners under employee benefit plans needed to know the characterization of such coverage for purposes of state taxes, according to Calhoun.

For example, an employer that provided spousal health coverage to a same-sex employee may have been required to include the cost of that coverage in the employee's state W-2, even though it would be excluded from the employee's income for federal tax purposes.

Take Nebraska, which said that because it did not recognize a same-sex marriage, employers were not allowed to exclude the value of an employer-provided health insurance plan for a same-sex spouse from an employee's income. Do those employers have to do anything retroactively?

The answer will depend on the state, Calhoun said in an email message. "When the federal government switched, it basically told employers that they did not have to go back and correct past years, but merely had to take the correct position going forward.

"If an individual had previously taken spousal health insurance into income for tax purposes, and wanted to change that, the individual had to take the initiative to file an amended return."

She said that given Obergefell came out in mid-2015, employers should already have excluded 2015 health insurance from W-2 income.

"Obviously state governments may take differing positions on whether they need to do anything for 2014 and previous years. However, my suspicion is that those states that did not already have same-sex marriage before Obergefell are unlikely to take any action that would impose a retroactive obligations on employers to recognize same-sex marriages."

Community Property States

Lambda Legal noted in March that the federal government has released guidance about federal income taxation for married same-sex couples who live in community property states.

It said that married couples in those states who file as "married filing jointly" will avoid having to engage in what is called income-splitting, whereby all community income earned by both individuals is added together and allocated equally to each one.

Those who file as "married filing separately" in a community property state will have to follow the same rules that apply to their opposite-sex counterparts.

They will have to apply income-splitting to their separate returns, unless an exception applies.

One could be that they entered into a valid prenuptial or postnuptial agreement in which they opted out of the community property system.

— Check out Planning Challenges Persist for LGBT Clients Despite Marriage Ruling on ThinkAdvisor.