IRS Recognizes Same-Sex Marriage for Federal Tax Purposes

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Same-sex couples took one more step closer to marriage equality throughout the land Thursday as they now join the ranks of Americans who can complain about the marriage penalty – or thank their lucky stars for the marriage bonus – come April 15th every year.

The Treasury Department issued a press release announcing IRS Revenue Ruling 2013-17. The 15-page ruling, according to the press release, announced:

“Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.”

To see the rest of the core of the IRS announcement, read below the jump.  

“Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.”

Essentially, if a same-sex couple has been joined in marriage in any state or jurisdiction that recognizes same-sex marriage, the IRS will recognize them as married for federal income tax purposes.  Period.  Even if they later move to Texas.

WHAT THE IRS SAID

The ruling gives two primary reasons for this: first, the statutory language, legislative history, and recent U.S. Supreme Court rulings compel it; and second, and more clinically (it is the IRS, after all), it is more efficient from a tax administration perspective.

“There are more than two hundred Code provisions and Treasury regulations relating to the internal revenue laws that include the terms “spouse,” “marriage” (and derivatives thereof, such as “marries” and “married”), “husband and wife,” “husband,” and “wife.” The Service concludes that gender-neutral terms in the Code that refer to marital status, such as “spouse” and “marriage,” include, respectively, (1) an individual married to a person of the same sex if the couple is lawfully married under state law, and (2) such a marriage between individuals of the same sex. This is the most natural reading of those terms; it is consistent with Windsor, in which the plaintiff was seeking tax benefits under a statute that used the term “spouse,” 133 S. Ct. at 2683; and a narrower interpretation would not further the purposes of efficient tax administration.” [emphasis added]

“In light of the Windsor decision and for the reasons discussed below, the Service also concludes that the terms “husband and wife,” “husband,” and “wife” should be interpreted to include same-sex spouses. This interpretation is consistent with the Supreme Court's statements about the Code in Windsor, avoids the serious constitutional questions that an alternate reading would create, and is permitted by the text and purposes of the Code.”

MARRIAGE PENALTY/BONUS AND TWO REGIMES

Perhaps the most notable practical effect emerging from this ruling is the availability of the marriage bonus to certain same-sex couples (and the problem of the marriage penalty for others).  The marriage penalty occurs when two people get married and pay more in tax together, filing as married filing jointly, than they would if they had remained single.  However, according to the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, more couples receive a “marriage bonus.”  This is to say that they pay less as a couple filing jointly than they would if they each were filing singly.  

The marriage penalty occurs when the spouses have similar incomes; when the spouses have disparate incomes (i.e.: one of them is the primary breadwinner), they receive a marriage bonus.  To see how this works, the Tax Policy Center has a marriage penalty calculator which may be found  here.

In a nod to the savings available in scenarios such as these, the ruling even explicitly states that married same-sex couples will be able to claim the bonus going forward (provided they are eligible) and seek it retroactively through amended returns.  

Perhaps more importantly, though, the ruling potentially lays the groundwork for dual regimes for similarly situated parties.  Same-sex married couples in Texas, for instance, could receive certain federal tax benefits, but they may still be denied certain other state benefits that are allowed to spouses in opposite-sex marriages.  While this is not precisely the scenario that Justice Kennedy contemplated in his June opinion, it is a situation where similarly situated couples will be treated differently, an outcome condemned by Justice Kennedy.

TEXAS COUPLES BENEFIT

Yesterday's ruling does, in fact, benefit same-sex Texas couples, though, only those who were married in a state that recognizes same-sex marriage – so the effect is limited.  However, Texas' conservatism does create an interesting scenario. In many states, state income tax is tied to federal income tax liability; a taxpayer figures his or her federal tax, and the formula to determine state tax liability is tied to that calculation.  Texas has no state income tax.  As a result, where Texas would have a stake in the same-sex marriage fight if it were being denied revenue – for instance, because a same-sex couple could claim the marriage bonus and lower its tax bill – on the basis of a legal status it doesn't recognize, Texas' anti-tax stance has actually denied it an avenue of attack on yesterday's announcement from the Treasury Department. It cannot credibly claim it has a dog in that fight.

PROCEED WITH CAUTION

It is important to note that this is a revenue ruling. It carries the force of law and can be relied on as precedent; however, it is not a statute or regulation.  If there is a change in command, there could be a new ruling which reverses this one. Indeed, even the IRS states:

“Rulings and procedures reported in the IRB do not have the force and effect of Treasury tax regulations, but they may be used as precedents. In contrast, any documents not published in the IRB cannot be relied on, used, or cited as precedents in the disposition of other cases.

In applying rulings and procedures published in the IRB, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered.  In addition, all parties are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.”

Despite that admonition, yesterday's announcement was good news for civil rights and came from a surprising herald. Al Capone fell because of taxes.  Maybe discrimination will as well.  

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