United States: UPDATE: IRS Issues Guidance On Same-Sex Marriage Tax Status

Last Updated: September 6 2013
Article by Rebecca A. Isaacs

August 30 Update:

The Treasury Department and IRS ruled on August 29, 2013, that, for federal tax purposes, legally married same-sex couples will be treated as married, whether or not they live in a state that recognizes same-sex marriages. The "state of celebration" (where the marriage occurred) takes precedence over the state of residence.

This has implications for employers in all states, even those states that do not currently allow same-sex marriage, because "federally-recognized same-sex spouses" may now request spousal benefits. They may also request certain refunds on income taxes they paid related to health coverage.

We will continue to provide updates as the IRS provides additional guidance. Read more details about the ruling on the IRS website, and contact us if you have any questions.

July 16 Update:

The Feds say "We will" to "I do's"–What the rulings mean for your employees' tax status
One quarter of US states have passed legislation recognizing same-sex unions. What it means for business owners and employees will become increasingly clear as the federal government provides guidance in consideration of the rulings. The federal government, for the most part, previously had stayed away from the issue, reiterating that marriage is a right held at the state level.  However, the recent Supreme Court rulings have brought federal issues to the forefront with two rulings in favor of same-sex marriage.

One case, United States v. Windsor, has specific implications for the tax treatment for same-sex marriages. In the case, Edith Windsor, a same-sex spouse, claimed a refund of estate taxes paid on her deceased partner's estate. Absent the marital deduction, the estate paid $363,000 in taxes that would not have been due had the two been a heterosexual couple. The Supreme Court ruled the Defense of Marriage Act (DOMA) unconstitutional as a deprivation of the liberty of a person protected by the Fifth Amendment.

New tax treatment for same-sex marriages

The Windsor decision allowed for the refund of the additional taxes paid in this case but, more importantly, allows for many of the same federal tax benefits enjoyed by heterosexual marriages to be available to same-sex marriages. It does not, however, override the states' authority on the recognition of same-sex marriages—and this states versus federal recognition is the key question that remains to be worked out. The IRS has said it will take up the issue and offer guidance as soon as possible.

Impact on employers

Changes in employee benefits will create the biggest impact for employers. Benefit plans may need to be amended to cover same-sex married spouses. It will be the responsibility of the employer to determine the taxability of benefits. See our DOMA FAQ's below to understand the various possible scenarios for your employees.


To whom does this apply?

  • Same-sex couples legally married under the laws of their state
  • Employees who fall under this classification
  • Employers who withhold federal and FICA taxes on earnings and benefits of these employees

Where will this apply?
This will be determined on a case-by-case basis in each state until further guidance is given.

  • Married and live in the same state – YES
  • Married in a legal state and live in a different state – Wait for additional guidance
  • States that recognize civil unions, domestic partners and common law marriages – Wait for additional guidance

What taxes does this affect?

  • Federal income tax – Will be the responsibility of the individuals to obtain tax planning and advice and change withholding filings with employer
    ~May provide tax savings like reduced combined floors on income dependent deductions or disadvantages such as the "marriage penalty," reduced threshold amounts when combining income, and reduced capital loss allowances
  • Payroll taxes – Will be the responsibility of the employer to determine the correct taxability of benefits
    ~Allow for savings of FICA and possibly FUTA or SUTA taxes at the employer and employee level based on new employee benefit classifications and eligibility for same-sex spouses
  • Estate taxes – Will be the responsibility of individuals to obtain tax planning and advice
    ~Allowance of marital deduction to same-sex spouses
    ~Allowance of portability, which allows the estate of a surviving spouse to utilize the unused portion of the deceased spouse's exemption amount
  • Gift taxes – Will be the responsibility of individuals to obtain tax planning and advice
    ~Allowance of gift splitting
    ~Allowance of transfers of assets between spouses with no gift tax consequences

When and how is this applied?

  • This is applied for the entire year 2013 as long as the couple was married prior to or in 2013 and for all subsequent years. Their only options for a filing status are "married" or "married filing separately."
  • Retroactively, same-sex couples are considered married back to their date of legal state marriage
  • For individual, gift, and estate taxes:
    ~For those who extended their returns in 2009, they can file protective refund claims or amend their returns up until October 15, 2013
    ~For 2010 returns filed without extension, they can file protective refund claims or amend their returns up until April 15, 2014
  • For payroll taxes:
    ~No official guidance has been issued as to whether this will be amended at the employer or employee level

Steps for employers

  • Stop imputing income for federal income, state income, and FICA tax purposes on health plan coverage provided for a same-sex spouse in those states that recognize same-sex marriages, and wait for further guidance regarding non-recognition states.
  • Consider whether this decision is a qualifying event for mid-year entry into current benefit plans.
  • Identify benefit plan provisions and procedures that may change in intent due to the new definition of spouse (e.g., required spousal consent for retirement plan distributions).
  • Notify employees of the new Supreme Court decision, and work with HR to determine a procedure for requesting employees to self-identify if they are affected by the court decision.
  • Remember to retain all personnel information in strict confidence.

When should a business act on this?

President Obama has requested guidance on these issues as well as others relating to this monumental decision as soon as possible.  Because the impact is so far reaching into many areas of the tax code and ERISA, it is advisable to await additional government instruction before acting on many of these items. BerryDunn is keeping tabs on the new guidance, and we will keep you updated. If you have any questions, contact your BerryDunn advisor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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