Gay Marriage and State Taxes

States that don't recognize same-sex marriage will face a few tax complications come 2014.
September 12, 2013

Since the Supreme Court stuck down the Defense of Marriage Act (DOMA) in June, states and localities have been grappling with what that means for everything from employee benefits to food stamps and welfare. But for states that don't recognize same-sex marriages, the ruling also presents a tax issue.

In August, the Department of Treasury and the Internal Revenue Service announced that married same-sex couples can file their federal income taxes jointly and they can do so based not on state of residency but based on state of celebration -- whether they were married in a state that permits same-sex marriage or not.

For same-sex couples living in states that permit same-sex marriage, end of story. There's no tax issue. They can file jointly for both federal and state returns. But in states that don't recognize same-sex marriage, there are complications for both the taxpayer and the state.

As Joe Henchman, an attorney and policy analyst at the Tax Foundation, pointed out in a briefing posted on the foundation's website, states that don't recognize same-sex marriage -- and don't plan to -- will have to take steps to resolve the irreconcilable differences some of their taxpayers now face.

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I talked to Henchman about what these differences are and what states can do about them. Here are highlights of our conversation in this edited transcript.

What are the complications when a state doesn't recognize same-sex marriage and a married same-sex couple living in that state wants to file taxes jointly?

Taxpayers who file jointly make reference in the state form to their federal form -- state law generally requires taxpayers to reference the federal tax return when filling out their state tax form. So, in light of the 2013 rulings, if a same-sex couple lives in the state of Maryland, which recognizes same-sex marriage, they can file just one joint state and one federal joint return like any other couple. But a married same-sex couple in Virginia, which does not recognize same-sex marriage, would file jointly for federal income tax but have to file two single returns at the state level. The problem is that when they file their state return [which has no joint form] and reference their federal return, which is now joint, there's a mismatch.

So it's a problem for state taxpayers, but also a problem for the state?

The taxpayer is getting irreconcilable directions from the state. It's the state's responsibility to provide guidance to resolve that confusion. There are 24 states that do not recognize same-sex marriage but do require state taxpayers to reference their federal tax return when preparing their state tax return. These 24 states must provide guidance to taxpayers on how to proceed before the 2014 tax season. We wanted to come up with suggestions for states to get through this process without having to reverse the state policy of not recognizing same-sex marriage.

What options are available to these 24 states?

The issue is that at the state level there are two single returns but at the federal level the taxpayer can do one joint return. When preparing the state return, the taxpayer needs to reference a single federal return that doesn't exist. One option would be to have states allow taxpayers to prepare dummy single returns. Taxpayers would be instructed to prepare a "dummy" federal return reflecting single filing and reference that when preparing the state return. Taxpayers who file "married filing separately" at the federal level would be permitted to file as single at the state level. Most taxpayers will be unaffected by this change, and while some same-sex taxpayers may face additional compliance costs, they will get the benefits of joint federal filing. All states need to do is a revenue ruling to say this is permissible.

Another option is to allow the taxpayer to take the federal return and cut the numbers in half for the state returns. For example, if the couple reports $50,000 in income on their joint federal return, each individual will report $25,000 in income on each state return. Depending on income disparity, this may have uneven effects on certain same-sex taxpayers, but would reduce compliance costs. It's very similar to the dummy return but a lot simpler. In the past, the federal government has allowed income splitting before we recognized different filing statuses. No state does that now, but it's an effective stopgap between different options. This would need a state ruling.

A third option is to create a new filing status. So we've got taxpayers filing as single, as married filing jointly, as married filing separately or as head of household. This option would create a status for "federal joint return" couples who file married jointly or file married separately at the federal level but are not permitted to do so at the state level under state law. Taxpayers would reference their federal return when preparing their state return, but the state would not recognize same-sex marriage. This would be an avenue for people to fill out tax returns of married filing jointly without the state calling it that -- because it would be against state law or constitution to do that. This option may be most ideal for states such as Colorado, Hawaii and Illinois, which recognize civil unions but not same-sex marriage. Depending on state law, this guidance may require only an administrative ruling.

There's one other obvious option: decoupling from the federal return. I take it you're against that one.

Decoupling would harm all taxpayers. It would require all of them to calculate their taxes twice. I'm concerned that states will take that approach. It would be a burden to their taxpayers. For the state, it would mean heavier compliance and administrative costs. The state can't just leave it to the federal government to audit. It would have to do a separate structure of checking returns because the numbers are completely different.

I'm hopeful states will do something constructive before the tax season starts. That's why I put the paper out with options that solve the problem without causing other problems -- and as a warning against decoupling.

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