After months of speculation, the Internal Revenue Service published guidance on August 29, 2013 regarding the treatment of same-sex spouses under the Internal Revenue Code. In Revenue Ruling 2013-17, the IRS confirmed that it will consider a same-sex couple married for federal tax purposes if they were married in a state or foreign country that recognizes same-sex marriage regardless of where the couple resides.
The new guidance allays concerns that the IRS would apply the more restrictive “domicile rule,” which would have excluded couples who reside in states that do not recognize same-sex marriage. Instead, Thursday’s guidance confers favorable tax treatment on all married couples, regardless of how their local state law treats same-sex marriage.
Though the new guidance goes into effect September 16, 2013, taxpayers have the right to file amended returns for “open” tax years in accordance with the new guidance. For example, if an employee was not allowed to pay for his/her same-sex spouse’s coverage on a pre-tax basis in past years, the employee may file an amended return to have those payments regarded as pre-tax salary reductions – resulting in a potentially significant recovery of overpaid income tax. The IRS also issued detailed FAQ guidance explaining how individuals in same-sex marriages should file their tax returns going forward.
While the IRS opted for a broad application of the definition of “spouse,” it stopped short of recognizing civil unions or registered domestic partners as “married” for federal tax purposes. Going forward, these couples can secure federal recognition of their relationship by obtaining a marriage license from a state or country that recognizes same-sex marriage. However, these couples lose out on the right to file amended returns for past tax years.
The Ruling also noted that the IRS would be issuing future guidance to assist sponsors of employee benefit plans in administering the tax effects of same-sex benefits. In the meantime, employers should also be on the lookout for guidance from state and local revenue boards, particularly in jurisdictions that do not recognize same-sex marriage. It remains unclear whether these jurisdictions will pass along the favorable federal tax treatment down to the state/local income tax level.