Same-Sex Married Couples See New State-Law Tax Complexity

Filing taxes remains a complex issue for married people of the same sex, according to Bloomberg News.

The IRS’s decision last month to recognize all same-sex marriages is reversing the scenario that had been in place. Until now, same-sex couples in states that recognize gay marriage filed joint state returns as well as separate federal returns declaring themselves single.

The burden of enforcing laws at odds with federal policy now falls on states such as South Carolina that prohibit same-sex marriage.

 “What happened before in marriage-equality states was that those states had to find a way to undo the discrimination at the federal level,” said Ruth Mason, a tax law professor at the University of Virginia. “Now you have states that don’t want to recognize same-sex marriages trying to redo the difference.”

Residents of states such as Massachusetts and Connecticut that legalized same-sex marriage will no longer have to combine separate federal tax returns for their joint state filings.

Instead, those who will have to split returns are same-sex couples who were legally married in one of 13 states, the District of Columbia or a foreign country and now live in a state that doesn’t recognize their marriage. Residents of states such as Oklahoma, Utah and Wisconsin will have to use different rules for their state and federal tax returns, adding complexity and cost. It’s prompting state officials to write new rules and come up with new tax forms.

“It has sort of flipped the states,” said Verenda Smith, deputy director of the Federation of Tax Administrators, a Washington-based association of state revenue officials.

There are more than 130,000 married, same-sex couples in the U.S., according to estimates from the 2010 Census.  In states that recognize same-sex marriage, the new system will be easier, because the federal and state returns will be as seamless as they are for opposite-sex couples.

Some states without same-sex marriage, such as Oregon, allow joint income-tax filing by registered domestic partners. Other states that prohibit same-sex marriage, such as Florida and Texas, don’t impose income taxes.

That narrows the conflict to 24 states that don’t recognize same-sex marriage and also have state income tax systems that refer to definitions or income data from the federal government, according to the Tax Foundation. The nonprofit group in Washington tracks state tax policy and advocates for simpler tax rules.

Some states will be able to provide rules for taxpayers administratively. Others may need to amend state laws that require taxpayers to use the same federal and state filing status and are now at odds with state constitutions.

Wisconsin made the first such ruling, announcing that it would soon issue a new tax form, “Schedule S: Allocation of Income to be Reported by Same-Sex Couples Filing a Joint Federal Return.”

States must act quickly. Starting Sept. 16, the IRS will prohibit same-sex married couples from filing individual returns. That means couples who received extensions through Oct. 15 for their 2012 tax returns will face the conflict immediately, without the help of guidance from their states.

Then, tax filing for 2013 will open in January 2014 -- before many state legislatures convene.

Beyond tax filing status, states will have to consider other ways in which marriage affects the definition of income.

For example, many companies offer health benefits to the same-sex spouses of their employees. Until the IRS decision, those payments were treated as taxable income.

Now, they won’t appear on the W-2 form that companies submit to the federal government, meaning that states that want to continue taxing that income must tell businesses to keep reporting the income to the state.

Other laws that involve marriage include those governing whether transactions between two people are taxable events.

“Tax accountants are going to be very busy,” said John McGowan, managing director of the LGBT practice at Northern Trust Corp. (NTRS) in Chicago.

Source:  Bloomberg News at http://www.bloomberg.com/news/2013-09-13/same-sex-married-couples-see-new-state-law-tax-complexity.html