The Treasury Department and Internal Revenue Service (“IRS”) have issued a landmark ruling that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not. It applies prospectively, as of September 16, 2013.
The highlights of the ruling are:
- Legally-married same-sex couples will now file their federal income tax returns using either the “married filing jointly” or “married filing separately” filing status and may amend prior returns that are still open under the statute of limitations to claim a refund.
- Employers providing group health plan coverage no longer have to include the value of group health plan coverage provided to a same-sex spouse in the employee’s gross income, and employees may now make contributions for their same-sex spouse on a pre-tax basis.
- Subject to future IRS guidance, employers may claim a refund of, or make an adjustment for, any excess social security taxes and Medicare taxes (FICA) previously paid with respect to imputed income attributable to health coverage provided to the same-sex spouse.
- Sponsors of tax-qualified retirements plans must now treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to such plans, such as for the purposes of distributions and qualified domestic relations orders.
Background & Scope of the Ruling
Revenue Ruling 2013-17 follows on the heels of the Supreme Court’s decision in U.S. v. Windsor, which invalidated a key provision of the 1996 Defense of Marriage Act that excluded a same-sex partner from the definition of spouse. 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. It applies to 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. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.
The ruling has implications for individual taxpayers. Legally-married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status. Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations. It also has important implications for employers providing benefits that cover spouses under group health plans, cafeteria plans, and tax-qualified retirement plans.
Group Health Plans & Cafeteria Plans
Many employers offer group health plans to their employees, and many of these employers maintain cafeteria plans that permit employees to pay for benefits on a pre-tax basis. Under the law prior to the ruling, employers would ordinarily include the value of group health plan coverage provided to a same-sex spouse in the employee’s gross income. Under the ruling, employers are no longer required to do so. Furthermore, the employee may file an amended Form 1040 to recover federal income tax paid on the value of the health coverage of the employee’s spouse. In addition, if the employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, the participating employee can also file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee’s same-sex spouse.
As a related matter, if the period of limitations is open for a refund, the employer may claim a refund of, or make an adjustment for, any excess social security taxes and Medicare taxes (FICA) paid. The IRS has indicated that this refund or adjustment may be made even if the employer cannot locate the former employee, provided the employer makes reasonable attempts to locate the former employee who received the benefits and that the refund is limited to the employer portion of FICA. A special administrative procedure for employers to file claims for refunds or make adjustments for excess social security taxes and Medicare taxes paid on same-sex spouse benefits will be provided in forthcoming guidance to be issued by the IRS. Although the employer may claim a refund or make an adjustment for FICA taxes, the employer may not do so for the purposes of federal income tax withholding. However, the employee may file for a refund of income tax due for prior years, and the employer may make adjustments for income tax withholding that was overwithheld from an employee in 2013, provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of 2013.
Generally, qualified retirements plans must now treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to such plans, even if the married couple live in a state that does not recognize same-sex marriages. For example, for plans where the spouse is the automatic beneficiary upon the participant’s death, the plan must pay the benefits to the same-sex spouse unless the spouse has consented to a different beneficiary. However, it is important to note that a person who is in a registered domestic partnership or civil union is not considered to be a spouse for these purposes. Qualified retirement plans must comply with these rules as of September 16, 2013. The rules that allow taxpayers to file amended returns for prior periods does not extend to qualified plan matters. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before September 16, 2013, but it intends to do so.
Effective Date & Retroactivity
The Treasury Department and the IRS will begin applying the terms of the ruling on September 16, 2013, but taxpayers may rely on the terms of the ruling for earlier periods for the purposes of filing returns and for claims for a credit or refund of an overpayment of tax with respect to employer-provided health coverage or fringe benefits (as long as the statute of limitations has not expired). However, the ruling does not apply retroactively with respect to other employee benefits and employee benefit plans and arrangements. For that, employers and participants will need to wait for further guidance.
To assist same-sex married taxpayers in understanding the ruling, the IRS has issued a set of Frequently Asked Questions explaining the application of the ruling regarding same-sex married taxpayers. It has also issued a corresponding set of Frequently Asked Questions regarding registered domestic partners and individuals in civil unions.