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IRS Proposes Clearer Tax Rules for Same-Sex Married Couples

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Oct 23rd 2015
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More than two years after the US Supreme Court, in United States v.Windsor, struck down the section of the Defense of Marriage Act that prohibits same-sex marriages, the IRS and the US Treasury Department released new proposed regulations clarifying the federal tax rules for married couples.

The regulations, announced on Oct. 21, would build upon the blueprint issued by the IRS in Revenue Ruling 2013-17 immediately following the landmark Windsor decision in 2013.

All barriers to same-sex marriages came crashing down on June 26, 2015, when the nation's top court ruled, in Obergefell v. Hodges, that such unions are legal in every state of the country.

Under the proposed regulations, any marriage of two individuals – whether they are of the same sex or opposite sex – will now be recognized for federal tax purposes if that marriage is recognized by any US state, possession, or territory. The regulations would also interpret the terms “husband” and “wife” to encompass the partners of a same-sex marriage, as well as a traditional marriage.

“The proposed regulations confirm that terms in the federal tax code relating to marriage should be interpreted to include same-sex spouses as well as opposite-sex spouses, ensuring that all are treated equally under the law,” Treasury Secretary Jacob Lew said in a written statement. “These regulations provide additional clarity on how the federal government will treat same-sex couples for tax purposes in light of the Supreme Court's historic decision on same-sex marriage.”

Generally, same-sex couples who have married can opt to file their tax returns as either a married couple filing jointly or married filing separately, just as an opposite-sex couple can.

However, the proposed rules would not apply to domestic partnerships, civil unions, or similar relationships. This would protect individuals who have specifically chosen to enter into this type of relationship under state law, rather than a marriage, because they can retain their single status for federal tax purposes.

Although the changes for same-sex couples are generally viewed as being favorable, such couples may face the “marriage penalty” for the first time. This results in a higher tax being assessed on a couple jointly than they would owe as single taxpayers. Typically, the marriage penalty is triggered when middle-to-upper-income spouses earn roughly the same amount of income. Conversely, same-sex couples may now benefit from other tax law provisions, including use of qualified retirement plans and IRAs, and estate and gift tax exemptions.

Led by Sen. Ron Wyden (D-OR), Senate Democrats introduced legislation shortly after the Obergefell decision that would remove gender-specific terms, such as “husband” and “wife,” from the tax code, but pundits give the bill little chance of enactment.

“With new rules enshrining marriage equality in our tax laws, we're taking another important step in a very long march,” Wyden said in a written statement on Wednesday. “To guarantee equal dignity in the eyes of the law, our policies must be built around fairness and acceptance. That's what these proposed rules are all about.”

We will continue to monitor developments.

Related articles:

Significance of Same-Sex Marriage Decision From a Tax Perspective
Dollars and Sense of Same-Sex Marriage
7 Ways Same-Sex Couples Can Plan Their Financial and Tax Affairs

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