News for tax year 2013…Post-DOMA edition

This is the 2nd installment in a multi-part series on significant tax changes that took effect in 2013. This week I’ll look at something that affects a pretty small portion of taxpayers…but in a very big way.
The Supreme Court decision to strike down the Defense of Marriage Act (DOMA) in 2013 came as great news to many people in 2013, especially the same-sex couples who may now have their marriages recognized by the federal government. Couples affected by this ruling should be aware of some key issues as they head into tax season.
First of all, the Supreme Court decision applies only to legal “marriages”. So if you’re in a Registered Domestic Partnership, Civil Union, or similar “marriage-ish” legal relationship, the Supreme Court decision changes nothing for you. The good news is even if you live in a state that doesn’t recognize gay marriage, the IRS will recognize a marriage performed in any state where it is legal, regardless of what state you legally reside in. (Of course, if you benefit from one of the handful of loopholes that were available to same-sex couples with non-legally-recognized marriages, this might not be good news for you…maybe staying as RDPs might make financial sense in some less common cases.)
Here’s a few things to keep in mind during the first “post-DOMA” tax season:
  • States are still free to choose whether or not to recognize gay marriages. This means that even though you can now file a federal return together as a married couple, you still might have to deal with filing Single returns at the state level. States are taking a number of different approaches to this…some states are allowing you to use the same status as your Federal return, others are requiring you to prepare separate state returns as though you were un-married. So if you’re in a same-sex marriage but living in a state that doesn’t recognize it, it’s a really good idea to seek professional guidance in preparing your tax returns for 2013.
  • You have the option (but not requirement) to amend any year between 2010 and 2012 in which you would have paid lower overall tax by filing jointly. For many couples I work with, the community property rules in California effectively mean there is little to no benefit to amending prior year returns. (As mentioned earlier, in some cases same-sex couples benefited from loopholes.) However, if you were in a same-sex marriage in 2012 or a prior year, and one spouse received health insurance from the other spouse’s employer, then it may very well be worth amending the prior years. This is another area that can be complicated, so professional guidance is recommended.
  • Also, even if it’s not worth amending your income tax return, you might still want to file for a refund of excess employment taxes if you had “imputed income” as a result of your employer taxing your spouse’s health benefits. The IRS recently issued instructions for employers to file for a refund of their half of these employment taxes, but your employer should contact you about reimbursement of employment taxes you paid. However, even if your employer doesn’t contact you, you still have the option of filing on your own for this reimbursement…which may be necessary for years before 2013 because I suspect many employers won’t go through all the trouble of following this procedure for previous years when it’s relatively small amounts involved for most employers (compared to the cost of amending prior year payroll records). I know this gets pretty confusing, but basically if you have a legal same-sex marriage, and one spouse received health benefits from the other spouse’s employer, contact a professional who’s familiar with this ruling to see if you may be eligible for a refund of taxes that were paid as a result of the IRS not recognizing your marriage.

So the vast majority of couples in same-sex marriages should see a tremendous simplification of their tax-filing requirements in the post-DOMA world…although some couples living in states that don’t recognize their marriages may have some new wrinkles to deal with. Even in states that recognize gay marriage, couples should still consult a professional in this first year in order to review the potential for refunds from prior years.

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4 Responses to News for tax year 2013…Post-DOMA edition

  1. Steve R. says:

    Thanks for your very helpful blog. Let me start by saying that if you’re unable to answer this question in this forum, I understand: In short, my employer stopped adding the imputed value of my husband’s medical benefits to my Federal income after 6/28/13, so I have roughly six months of imputed income to “nullify” somehow on my 2013 W-2. (I asked my employer if they could reverse it and they told me it was “between me and the IRS.”) Can I simply deduct that extra income somewhere on our joint 2013 form 1040, or is there some other process (or other IRS form) that we have to use?

    • class5tax says:

      That’s a good question. There’s actually a couple types of taxes at work here…income tax and employment taxes.

      First, there’s the income tax, which is calculated based on the amount that shows up in box 1 of Form W-2. I’ve only seen a few W-2s so far from people affected by this situation, but it appears most employers are only reporting the actual taxable wages in Box 1, after accounting for the fact that health insurance should have been treated as non-taxable all year. So even though early pay stubs may have shown imputed income, the actual Box 1 income on Form W-2 shouldn’t include that amount. It’s a pretty easy adjustment for employers to make, so hopefully the vast majority will do that. You might want to clarify with your employer whether the box 1 amount actually includes those imputed wages.

      Of course, you probably also had additional withholding on early pay checks because of the imputed income. That’s not a simple adjustment because they’ve already paid that money to the government on your behalf. But that’s OK because you’ll just get that withholding back as a larger refund when you file.

      Then there’s employment taxes…the FICA/Medicare withholding that occurs on all wages. This one is more complicated. Some employers will file for this refund on behalf of their employees using IRS Notice 2013-61. Half of this withholding is paid by the employer, so they keep their half and refund your half to you directly. But it sounds like that’s not the case for you unfortunately. For an individual to claim the refund of employment taxes, you have to file Form 843…a very seldom-used form that before this case really only applied to foreign students working in the US and not subject to FICA.

      Hopefully that helps somewhat. Unfortunately this is a complex area not well-suited to easy forum-type answers. Good luck!

      • Steve R. says:

        Thank you for taking the time to reply to my question. That’s really generous of you. I’ve confirmed with my employer that box 1 of my W-2 does include imputed income for the first half of the year, more than $3,000 of it. I’m not sure I’m willing to pursue reclaiming overpaid employment taxes, but I still need to deduct that imputed income somewhere in Turbotax Deluxe 2013 to get back the excess withholding. And I’m not the only one with this question; I’m watching a topic on the Turbotax discussion forums, but so far nothing.

        I’ve described the most logical place I could find to deduct it below. Do you see any red flags using this approach?:

        1. Under the “Federal Taxes” tab, click on the “Wages & Income” section.

        2. Click the button, [I’ll choose what I work on].

        3. Under “Less Common Income”, click the [Start] or [Update] button next to “Miscellaneous Income”

        4. Click the [Start] or [Update] button next to “Other income not already reported on a Form W-2 or Form 1099”

        5. Select “Yes” and click [Continue].

        6. Click [Continue] to skip “Wages Earned as a Household Employee”.

        7. Click [Continue] to skip “Sick or Disability Pay”.

        8. Select “Yes” and click [Continue] for “Any Other Earned Income”.

        9. Select “Other” and click [Continue] for “Enter Source of Other Earned Income”.

        10. Enter a description and a negative number under you or your spouse’s name. I entered this for my description: “less imputed income for same sex spouse medical insurance”

        This deduction appears on line 9 of the form, “Wages, Salaries, & Tips Worksheet”.

  2. class5tax says:

    Yeah, that’s a pretty good approach to doing it. You might get an IRS CP2000 notice because the reported wages on line 7 of Form 1040 will be less than what’s on your W-2(s). But it will be easy to resolve with a simple letter of explanation.

    There is another way to do this and probably NOT get the CP2000 letter. (Basically, the adjustment winds up on Line 21 of Form 1040 instead of line 7.) But if you do it this alternate way, there’s frequently another adjustment you have to make to “earned income” or else you might wind up with an inaccurate return. So this second approach is best left to professionals.

    I’d recommend sticking to what you’re doing, and just don’t sweat it if you get a CP2000 letter…it’s just an automated matching thing in the IRS system, and easy to resolve.

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