Tax time and total confusion
April 7th, 2011
It is tax time and across the country individuals and families are finalizing their income tax returns and trying to makes heads or tails out of Alternative Minimum Tax and Capital Loss Limitations and Net Operating Loss Carrybacks and Itemized Deduction Phase Outs and a whole host of other intricacies of adherence to the federal tax code.
But for same-sex couples, the confusion starts with Box One, filing status. What is the filing status of a same-sex legally married couple?
Well, that depends. There simply isn’t a clear answer.
Due to DOMA, the Defense of Marriage Act, the federal government currently takes the position that you are roommates – legal strangers – who share residency but not lives. Theoretically, one might expect to see rental income or gift tax or other such items on returns, though, to their credit, the IRS does not apply such rigidity to either gay or straight cohabiting couples.
So the final answer (so far) is that you file as single (or as head-of-household if you qualify). But that doesn’t necessarily mean that you report your income as though you were single.
Because the IRS, while not recognizing your marriage, may recognize your legal right to your spouse’s income. And that depends on where you live.
If your state has community property laws, then you have a claim on half of the income of your heterosexual spouse. But some states have also applied community property laws to same-sex relationships, whether called marriages, civil unions, or domestic partnerships. In California, for example, one half of a same-sex couple has a legal claim on half of her partner’s income whether she is in a domestic partnership or got married in the 2008 window.
And the IRS is now taking the position that if you have a claim on it, you need to report it. So in California, for example, each half of the partnership would claim half of the partnership’s community property income (being careful to exclude income that does not fall into this category) and prepare income tax returns as “Single” to report their share. In Massachusetts, not a community property state, the same couple would segregate their income and prepare “Single” income tax returns reflecting only their own income.
All of which is thrown out the window for state return preparation. Each state defines who is or who is not married and requires those couples which they recognize as married to file as “Married”. Some, like California, require that domestic partnerships or civil unions prepare “Married” returns.
But that isn’t the extent of it. Most states don’t duplicate the entire return calculation process but instead start with the federal numbers and make adjustments. So while you cannot file a joint federal return, in order for the state to have a starting point, you must prepare a joint federal return so as to come up with the numbers you would report were you allowed to do so.
Thus, depending on where you live, your income tax return for the state could be filed with a different status than your federal income tax return, your state return could be based on a federal return which will never be filed, and your federal return may or may not recognize a portion of your income as jointly earned though reported as though single.
Confused? You should be.
So now a group of married same-sex couples have started a campaign to Refuse To Lie about their marriage status. As they are legally married in the eyes of their state, they find it offensive – legally and morally – to be forced to say that they are not. And just as there is an inherent indignity to being forced to annually tick a box labeled “I’m inferior”, so too is in unconscionable to force citizens to tick a box that is premised in that concept. (New York Times)
“More people are refusing to lie on those forms, even though the government is telling them to,” said Nadine Smith, executive director of the gay, lesbian, bisexual and transgender advocacy group Equality Florida, who plans on filing a joint return with her wife, Andrea. “It would be both dishonest and deeply humiliating to now disavow each other or our marriage and declare ourselves single on our tax form.”
This is not a new concept. I’ve heard of tax rebels who have, for years, flouted the tax code and took a stand for equality. Such efforts tend to be ineffective and costly. The IRS is not a compassionate or forgiving institution.
But this year may be different. The Defense of Marriage Act has been declared to be in violation of the US Constitution, the Justice Department has determined it to be indefensible, and there is no presumption that the SCOTUS will uphold the law. So it is not unreasonable to act accordingly (though the campaign notes that you must act in a manner that is in conformity with the IRS’s procedures for challenging positions, not haphazardly).
My best guess is that if and when DOMA is overturned, it will not be retroactive. In other words, for 2010 you will most likely be required to file as strangers even if DOMA is tossed out. But those who challenge the provision probably will not face punitive action or be accused of tax fraud.
Should you decide to prepare your taxes using Married status, the smartest action would be to place the difference in taxes in a trust account to be released upon determination of the DOMA challenges and be very very careful. And don’t expect your tax accountant to go along with you; accountants are increasingly being held liable for their client’s positions.
But there are other options that I find both safe and smart.
The “Refuse to Lie” Web site warns same-sex couples of the risks of filing jointly, and explains different options to both adhere to the law while expressing that they disagree with it. One way to do that would be to put an asterisk by the “single” box, and then indicate at the bottom of the tax form that you are “only single under DOMA.” Another option, the site says, is to attach a note with a similar message.
They can’t punish you for “providing a full disclosure” and such a stand can give you something to talk about around the water cooler. (And never underestimate the world-changing power of water-cooler conversation)