Personal Finance

Congrats, Same-Sex Newlyweds: Here's Your Tax Bill

Allison Linn, TODAY
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Same-sex couples in Washington state rushed giddily to the courthouse earlier this month after Washington became one of three states where voters approved laws giving them the legal right to marry.

Those newlyweds will probably be less excited the first time they get to file their tax returns together.

The gap between state laws that recognize same-sex marriage, and federal laws that don't, makes tax season complicated at best, and costly at worst, for same-sex spouses.

"It's certainly a big headache for people. I've literally seen them reduced to tears," said M.V. Lee Badgett, research director of the Williams Institute for Sexual Orientation Law and Public Policy at the University of California, Los Angeles.

The Supreme Court's decision to hear cases related to same-sex marriage could clarify the confusion if the court ends up striking down the Defense of Marriage Act, a national law that defines marriage as between a man and a woman.

That could clear the way for the federal government to recognize same-sex marriages in the states where it is legal: Washington, Maryland, Maine, Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, New York and the District of Columbia.

The recognition would mean that same-sex couples could file a joint tax return and be eligible for tax breaks and other government benefits, such as spousal Social Security benefits, that heterosexual spouses currently have.

But a decision on those Supreme Court cases is not expected until June. And as it stands now, filing taxes is a lot more complicated for same-sex couples because they are considered married by their state government and not married by the federal government.

"It's very laborious," said Judi O'Kelley, deputy director of development for Lambda Legal, which does advocacy work and provides legal guidance for lesbians, gay men, bisexuals and transgender people.

To file state and federal income tax returns, experts say same-sex couples must first fill out a mock federal tax form as a married couple, which they use as the basis to file their state tax returns. Then, they must go back and file a second set of federal tax returns as if they are both single, because the federal government does not recognize their union.

In community-property states such as Washington and California, there is one more hurdle for the individual returns. Couples have to essentially split their wages down the middle, said Marci Flanery, a CPA who practices in Seattle. So, if one spouse makes $100,000 and another spouse make $20,000, each return would end up showing income of $60,000.

That's because even though the marriage isn't recognized, their assets are considered shared property.

There are other tax issues to consider. Same-sex partners who get health benefits from their spouse's employer are taxed on those benefits, while heterosexual married couples are not.

Couples also have to figure out how to allocate deductions, and many worry about the tax implications should one same-sex spouse give the other money, or leave the other an inheritance.

"There are lots of rules in the Internal Revenue Code that depend on marriage," said Patricia Cain, a professor of law at Santa Clara University and an expert on these issues.

Experts say that many same-sex couples probably don't realize the tax implications when they get married, and may file incorrectly because they don't know the rules.

Still, some are clearly thinking about money in addition to love as they prepare to get married.

O'Kelley said about 500 people showed up for a forum on legal issues related to same-sex marriage, held in Washington state just days before those unions became legal.

Flanery said she's had a steady stream of potential accounting clients coming in to talk about the tax implications of a potential same-sex union, and especially the income-sharing provision.

"I don't see that they're not getting married because of this, but they do want to know about it," she said.

The tax issues may be a headache, but they aren't always a financial burden. For couples who both earn a higher salary, the current system can be a good financial deal.

That's because high-earning couples are sometimes subject to a so-called marriage penalty in which their joint filing status puts them at a higher tax rate than if they were filing individually. By splitting their income, they can each enjoy a lower tax rate.

Nevertheless, even some advocates who benefit financially from the current situation say they'd be willing to pay more taxes to have the federal government recognize their marriage, and to be eligible for other federal safeguards.

"I don't want to pay it, that's true, but we're not going to get divorced over it," said Cain.