Federal Tax Equality

In the Windsor case, the Supreme Court found Section 3 of DOMA unconstitutional because it required the federal government to treat legally married same sex couples as unmarried, even though their state of residence considered them married. Soon after the ruling, LGBT rights groups, including Family Equality Council, began to analyze the impacts of the ruling on federal law. Together with those organizations, we published a series of fact sheets that reviewed the likely impact of the Supreme Court’s decision (available here: https://dev-fec.pantheonsite.io/get_informed/advocacy/after_doma/).

In the report that discussed federal income taxes, we pointed out that much of the IRS’s previous guidance used a “place of domicile” rule; this meant that the IRS looked to the state where you lived to determine if you were married for federal tax purposes.  Accordingly, there was no doubt after Windsor that same sex married couples living in “recognition” states would now be treated as married for purposes of federal tax law. However, the question of how the IRS (and other government agencies) would treat such couples living in – or moving to – non-recognition states was left open: would married same sex couples living in such states still be treated as unmarried under federal law? Or would they go from being unmarried everywhere (pre-Windsor) despite state law, to being married everywhere despite state law?

Yesterday’s announcement that the Department of the Treasury and the Internal Revenue Service will immediately begin using a “place of celebration” rule for all married couples is big news for our families. This means that, beginning with the 2013 tax year all married couples (but NOT those couples in Registered Domestic Partnerships or Civil Unions) will be required to file their federal tax returns as either “Married, filing jointly” or “Married, filing separately” – whether the state they live in recognizes their marriage, or not. Moreover, the guidance issued thus far by the IRS (they’ve promised more guidance, soon) says that 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.

This IRS ruling will go a long way toward equalizing the playing field for LGBT families who, prior to this ruling, were disadvantaged in many ways under the federal tax system. In our All Children Matter report, we illustrated the differential treatment between two families of four, one headed by opposite sex parents and the other headed by same-sex parents. In each scenario, one parent is the primary breadwinner and the other works part-time, while their children are in school. Despite earning an identical amount ($48,202) in wages, the same-sex couple ended up paying $5,838 more in federal taxes, due to the previously unfair treatment of the federal tax code. Not only will that couple file as married from now on, it may file amended returns for prior years within the statute of limitations. That extra money will certainly be a welcome relief for same-sex headed families.

Included in the calculus of that number, is the fact that federal tax law used to require that employers collect tax on any health insurance benefits provided for the same-sex spouses of their workers and the children of those spouses. Insurance coverge for families in opposite sex marriages was provided without taxation. This ruling means that disparity will now stop.

To be sure, some families – especially those where both spouses are high wage earners – will be now subject to the so-called “marriage penalty” where they will pay more in income tax than they would if they could file singly. Just as some opposite-sex couples do.   

In addition to the financial benefits many of our families will now enjoy with this ruling, no price tag can be placed on the symbolic and real recognition of the legitimacy of our families when we file our Federal income tax returns. 

Most states, of course, continue to deny our full equality. But federal recognition of our marriages, no matter where we live, will undoubtedly be a catalyst for change. This tax ruling, just by itself, will create administrative headaches for state governments that use federal tax filing status in their own determinations of status and it will encourage more employers to treat all married employees alike, regardless of state of domicile, so that it can properly administer employee benefit programs. It is especially significant because it tangibly demonstrates that couples living in states that offer only civil unions or domestic partnerships do not have all the rights of married couples, and that only true marriage equality is the answer.

We celebrate the progress the IRS ruling represents, and we will continue our advocacy toward the day when all our families are treated equally, everywhere.