Many Opportunities Exist for Amended Returns: Same-Sex Marriages Recognized by IRS for Federal Tax Purposes
(Parker's Federal Tax Bulletin: September 12, 2013)
In June 2013, in U.S. v. Windsor, 2013 PTC 167 (S. Ct. 2013), the Supreme Court struck down a provision in the Defense of Marriage Act (DOMA) that had prevented same-sex couples from receiving many federal benefits. However, the decision left many unanswered questions one of the biggest being what happens when a same-sex couple is married in a state that recognizes such marriages but then lives in a state that doesn't recognize the marriage?
In recently released guidance, Rev. Rul. 2013-17, the IRS ruled that if a same-sex couple is married in a state that recognizes such marriages, that marriage will be recognized for all federal purposes, no matter where the couple lives. However, the ruling goes on to say that there is no recognition for federal tax purposes of individuals, whether of the opposite sex or the same sex, who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state.
Practice Aid: Parker Tax Publishing has prepared several new client letters that practitioners may use to update their clients about these new rules. These may be found in the Sample Client Letters database (¶320,142, ¶320,144, ¶320,146, and ¶320,148)
Practice Tip: The Supreme Court decision and Rev. Rul. 2013-17 present many opportunities for practitioners to file amended returns not only for the same-sex individuals, but also for businesses that paid social security taxes and Medicare taxes on benefits to a same-sex spouse of an employee.
The IRS also released the IRS FAQ on Same-Sex Married Couples on its website, which answers additional questions. In the FAQ, the IRS states that, beginning with the 2013 tax year, and for the 2012 tax year if the return has not been filed by September 16, 2013, a same-sex couple that is living together must file their federal income tax return using the filing status of either married filing jointly or married filing separately. Additionally, the FAQ provides guidelines that retirement plans must follow in order to retain their status as a qualified retirement plan, including the provision that a plan that only operates in a state that doesn't recognize same-sex marriages, must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
Filing Refund Claims
Same-sex couples that were married in years where the statute of limitations is still open should review prior-year tax returns to see if filing amended returns would be beneficial. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer provided health coverage for an employee's same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee's spouse been recognized as the employee's legal spouse for tax purposes.
Example: ABC Corporation sponsors a group health plan covering eligible employees and their dependents and spouses (including same-sex spouses). Fifty percent of the cost of health coverage elected by employees is paid by ABC. Bob was married to Mike at all times during 2012. Bob elected coverage for Mike through ABC's group health plan beginning January 1, 2012. The value of the employer-funded portion of Mike's health coverage was $250 per month. The amount in Box 1, Wages, tips, other compensation, of the 2012 Form W-2 provided by ABC to Bob included $3,000 ($250 per month x 12 months) of income reflecting the value of employer-funded health coverage provided to Mike. Bob filed Form 1040 for 2012 reflecting the Box 1 amount reported on Form W-2. Bob may file an amended Form 1040 for 2012 excluding the value of Mike's employer-funded health coverage ($3,000) from gross income.
Amended returns could also be filed in situations where an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis. A participating employee can file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee's same-sex spouse for all years for which the period of limitations for filing a claim for refund is open. If an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee's same-sex spouse under the employer's health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee's spouse.
Example: ABC Corporation sponsors a group health plan as part of a cafeteria plan with a calendar year plan year. The full cost of spousal and dependent coverage is paid by the employees. In the open enrollment period for the 2012 plan year, Carl elected to purchase self-only health coverage through salary reduction under ABC's cafeteria plan. On March 1, 2012, Carl was married to David. Carl purchased health coverage for David through ABC's group health plan beginning March 1, 2012. The premium paid by Carl for David's health coverage was $500 per month. The amount in Box 1, Wages, tips, other compensation, of the 2012 Form W-2 provided by ABC to Carl included the $5,000 ($500 per month x 10 months) of premiums paid by Carl for David's health coverage. Carl filed Form 1040 for 2012 reflecting the Box 1 amount reported on Form W-2. Carl's salary reduction election is treated as including the value of the same-sex spousal coverage purchased for David. Carl may file an amended Form 1040 for 2012 excluding the premiums paid for David's health coverage ($5,000) from gross income.
In the situations above, the employer can also file an amended return and claim a refund for the social security taxes and Medicare taxes paid on the benefits if the period of limitations for filing a claim for refund is open. The employer should file the claim on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
OBSERVATION: The IRS said it will provide a special administrative procedure for employers to file claims for refunds or make adjustments for excess social security taxes and Medicare taxes paid on same-sex spouse benefits in the near future.
Additionally, if an employer cannot locate a former employee with a same-sex spouse who received the benefits described above, the IRS said the employer can still claim a refund of the employer portion of the social security and Medicare taxes on the benefits. According to the IRS, if the employer makes reasonable attempts to locate an employee who received the benefits that were treated as wages but the employer is unable to locate the employee, the employer can claim a refund of the employer portion of social security and Medicare taxes, but not the employee portion. Also, if an employee is notified and given the opportunity to participate in the claim for refund of social security and Medicare taxes but declines in writing, the employer can claim a refund of the employer portion of the taxes, but not the employee portion. Employers can use the special administrative procedure that the IRS said it will issue shortly to file these claims.
Finally because services performed by an employee in the employ of his or her spouse are excluded from the definition of employment for purposes of social security, Medicare and FUTA taxes, a sole proprietor can claim a refund of the social security, Medicare, and FUTA taxes paid on the compensation paid to his or her same-sex spouse as an employee in the business.
Head of Household Filing Status
As noted above, a taxpayer who is married cannot file using head of household filing status. However, a married taxpayer may be considered unmarried and may use the head-of-household filing status if the taxpayer lives apart from his or her spouse for the last six months of the tax year and provides more than half the cost of maintaining a household that is the principal place of abode of the taxpayer's dependent child for more than half of the year.
Rules Relating to Dependents and Children
While a same-sex partner may have previously been able to qualify as a dependent, that is no longer the case. A taxpayer's spouse cannot be a dependent of the taxpayer.
If a child is a qualifying child of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child lives for the longer period of time during the tax year. If the child lives with each parent for the same amount of time during the tax year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.
Under Code Sec. 23(d)(1)(C), if a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, the adopting parent cannot claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child.
Rules Applicable to Retirement Plans
Under Rev. Rul. 2013-17, qualified retirement plans are required to comply with the following rules:
(1) A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.
(2) For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
(3) A person who is in a registered domestic partnership or civil union is not considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person's partner is of the opposite or same sex.
The following examples illustrate the qualified plan rules:
Example: Plan A, a qualified defined benefit plan, is maintained by ABC Corporation, which operates only in a state that does not recognize same-sex marriages. Nonetheless, Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
Example: Plan B is a qualified defined contribution plan and provides that the participant's account must be paid to the participant's spouse upon the participant's death unless the spouse consents to a different beneficiary. Plan B does not provide for any annuity forms of distribution. Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant. Plan B is not required to provide this death benefit to a surviving registered domestic partner of a deceased participant. However, Plan B is allowed to make a participant's registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary.
Qualified retirement plans must comply with these rules as of September 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many matters, this rule does not extend to matters relating to qualified retirement plans.
OBSERVATION: The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before September 16, 2013. It stated that it intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17. It is expected that future guidance will address the following, among other issues: (1) plan amendment requirements (including the timing of any required amendments); and (2) any necessary corrections relating to plan operations for periods before future guidance is issued.
Parker Tax Publishing Staff Writers
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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.