Should Same-Sex Married Couples File Protective Claims, Amended Tax Returns, or Nothing?

Money and Tax Return

The long arm of the IRS may have become a bit shorter

“This is too difficult for a mathematician. It takes a philosopher.”
–Albert Einstein, on taxes

On June 26, 2013, the U.S. Supreme Court overthrew the Defense of Marriage Act, meaning that, for same-sex couples who live in states that recognize non-traditional unions, the tax rules had changed. In U.S. v Windsor, the Supreme Court judged that the plaintiff, who had been legally married in Canada and resided in New York, a state that recognizes same-sex marriages, did not have to pay estate tax. The IRS had previously required that Ms. Windsor pay $363,053 in estate taxes, which, legally recognized married couples are not required to pay.

According to the opinion of the Court, as delivered by Justice Anthony Kennedy,

The State’s power in defining the marital relation is of central relevance in this case quite apart from principles of federalism. Here the State’s decision to give this class of persons the right to marry conferred upon them a dignity and status of immense import…

Thus, if a couple lives in a state that recognizes same-sex marriages and has a legally recognized marriage, the IRS must treat them as a married couple.

Since DOMA disavowed the states’ rights to recognize same-sex marriages, these couples were forced to file as Single and/or Head of Household.

Being forced to file differently has had significant impacts on same-sex married couples. The effective tax rates for individuals are generally higher than effective tax rates for married couples. Here are a few examples of where married couples get tax benefits that their single counterparts do not:

  • Capital gains tax exclusion for sale of a home. Single people can avoid capital gains taxes on houses they have lived in for 2 of the past 5 years up to $250,000. Married couples get to avoid capital gains taxes on $500,000. Furthermore, the couple could have lived together before they were married, and the IRS gives credit towards the two years requirement.
  • Matching capital losses against capital gains. Capital losses can, in general, offset capital gains. If one of the couple had capital losses and the other had capital gains, if they filed as single filers, they were not able to use the losses to offset the gains and paid more in taxes.
  • Taxation of employer provided healthcare benefits. A spouse who receives employer provided healthcare benefits receives them tax free. A non-married dependent has to pay taxes on the benefits.
  • Surviving spouses. When one of the spouses passes in a year, the survivor can still file as married filing jointly in the year of the death and can file as a widow(er) with a dependent child for two years following the year in which the spouse died.
  • Lower total income tax on highly differential incomes. This isn’t a common case, but sometimes when one spouse makes very little money, the overall tax burden is lower for married couples than when filing separately.
  • Charitable contributions. If one of the two members of the couple made charitable contributions in excess of the limits for deductions, they could combine their contributions and get a higher amount deducted.
  • Estate taxes. This was the point raised that got DOMA overturned. When one spouse dies and passes the estate to the remaining spouse, there is an unlimited estate tax exclusion. When an estate passes to a recipient other than a spouse, then the estate can be subjected to both federal and state estate taxes.

What to do now that DOMA has been overturned?

As of August 29, 2013, the IRS ruled that if you had a legally recognized marriage in a state that recognizes marriage, then, regardless of where you live, you will be treated as married for tax purposes.

There are three separate paths to take now that DOMA has been overturned.

In any case, the statute of limitations for amending or protecting your income tax claims is three years after the date of the filing. In most cases, it’s 3 years past April 15, unless you received an extension to file.

If you live in a state where same-sex marriages are recognized.

In this case, the path is reasonably clear. You will need to file a 1040X, which is an amended tax return, along with a 1040 for a married filing jointly tax return. There are a few cases where filing separately is still advisable, such as if one member has high medical expenses that pass the AGI threshold for a single person and can, therefore, deduct the expenses, but they’re not high enough to pass a joint threshold.

The Form 1040X simply lists the differences between what you previously filed and what you will file with your amended return. That’s why you have to file a new 1040 as well. You can’t just file a new 1040; you have to alert the IRS to the changes and what the differences are.

You’ll also want to file amended state tax returns.

If you live in a state where civil unions are recognized and the issue of marriage is being fought in the courts.

There are only a handful of states where this applies, meaning that a recognition of the legality of marriage in the states could change the rules retroactively.

If this is the case, then you will need to file a protective claim for your state taxes. For federal taxes, you will follow the instructions in the section above, as if you lived in a state that recognized same-sex marriages.

A protective claim is different than filing an amended return. If you file an amended return, you’re simply filing a different return based on existing rules and interpretations. If you file a protective claim, you’re filing for a refund that is based on contingent, future events that may not be decided until after the statute of limitations has elapsed.

The rules for filing protective claims for state tax refunds will differ, so check with your state tax authority for more details.

In either of these cases.

Unless you’re very adept at filing your own taxes or have a very simple tax return, you’ll want to consult with a smart tax advisor. If you used tax software, run the amended return through the tax software first to see if the difference in taxes justifies the cost of using a CPA or a tax preparer. This is a fairly complicated situation, so I’m not really a fan of doing the roll-your-own approach here, but you should be able to get a ballpark idea of whether or not using an expert will pay for itself.

If you live in a state where same-sex marriage is not recognized.

Again, due to the August 29, 2013 IRS ruling, you can file a claim as married filing jointly for your federal taxes, and will need to file amended tax returns as per the first section above.

You should investigate filing a protective claim on your state tax return in case the laws change and recognition is granted retroactively.

I’m not an attorney, Kreskin, or an IRS expert, but my guess is that if litigation succeeds, the recognition date will not be retroactive, so if I were in that situation and state taxes are high enough, I’d either move to a state that recognized same-sex marriages or take my chances and file an informal protective claim. I would not go through the expense of preparing and filing an amended return in association with the protective claim, as the expected benefit compared to the cost of preparing three years of returns would weigh against the decision in my opinion. Filing an informal protective claim for your state should be a fairly simple exercise, and once you get the blueprint for one protective claim, you can continue to file each year until the law becomes settled.

The tax code, in general, favors married couples. If you’re a same-sex married couple who was affected by the overturn of DOMA, you have work to do to amend and reduce your taxes or protect potential future claims. The wheels of government bureaucracy will grind ever so slowly, so don’t expect immediate results, but you do, because of the statute of limitations, do need to act promptly. Plus, if you act before tax season really gets fired up, you may be able to catch a tax expert in a slow season and get a lot more personalized attention!

Are you affected by DOMA? What are you doing to reclaim potentially overpaid taxes? Let’s talk about it in the comments below!

Around a year ago, I wrote about why you might want to keep more than six months of expenses in liquid assets. If you haven’t read it, go check it out!

About Jason Hull

Jason Hull is a Fort Worth financial advisor. Before becoming a Fort Worth financial planner, Jason co-founded, built, and sold a software development company. He is a CFP candidate, has a MBA from the University of Virginia, and a BS from the United States Military Academy at West Point. He is the owner of Fort Worth financial advisor Hull Financial Planning.

Close