Box Turtle Bulletin

Montana takes a DADT approach to tax filing status

The Montana Revenue Director Mike Kadas has said that same sex couples in Montana cannot file joint state income tax returns – even if they do have a valid marriage from another state and their federal filing status is ‘married’. However, he won’t be asking. (Billings Gazette)

He told the committee the department has had few cases in which a taxpayer’s marriage status has been at issue.

“Therefore, we do not believe any compliance initiatives associated with verifying the marital validity of any type of marriage, opposite sex or same sex, is necessary,” he said.

Kadas said if the agency undertook a compliance initiative effort to verify marriages, it would apply to all types of marriages — opposite sex, same sex and common law. That would require the department to ask taxpayers to provide it with information that supports their claim that they have a valid marriage, he said.

Unfortunately, the department has no other means to verify taxpayers’ marital status other than directly asking them, Kadas said. That is something that at least some taxpayers would find to be intrusive, he said.

“We are also confident that if we did undertake a marriage compliance initiative, the cost of such an initiative would far outweigh any financial benefit received from enforcing Montana’s tax laws,” he said.

Equality Means that You, Too, May Be Eligible for the “Marriage Penalty”

Two months after the U.S. Supreme Court declared Section 3 of the Defense of Marriage Act unconstitutional, the Treasury Department has ruled that same-sex married couples will be treated just like all married couples when they file their tax returns, regardless of whether they currently live in a state that recognizes same-sex marriage. That’s the good news for many and bad news for those whose combined incomes when filed as married pushes them into a higher tax bracket. Those are the breaks.

But the good news for everyone is that the Treasury Department’s determination on how same-sex couples will be treated on taxes means that they will be treated as married couples with federal estate and gift taxes, and the tax breaks that married couples get when a spouse is covered under an employer-provided health plan. Until now, the cost of those benefits was seen as extra income that was taxed at the full rate.

The ruling does not apply to couples who have domestic partnerships, civil unions, or other non-marriage arrangements. Married couples have the option of filing an amended return to claim refunds for tax years 2010 through 2012.

For married couples in states which do not recognize same-sex marriage, life can become interesting when they go to file the state income taxes this year. Before yesterday’s ruling, couples in, say, Massachusetts had to fill out their Federal forms twice: once as single individual for Federal tax purposes, and again as a married couple to figure out what their correct (and lower) Massachusetts state income tax would be. That’s because most state governments peg their state taxes according to what you paid at the federal level. But now that what married couples will be paying a different rate at the federal level, it’s unclear what the 37 states which do not recognize same-sex marriage will require their residents to do:

“I expect what will happen is that Ohio will say you have to file as single, and that they will do that based on the constitutional amendment,” (Lambda Legal director John) Davidson said. Santa Clara University Law professor Patricia Cain agreed, telling BuzzFeed states like Ohio with such amendments will have to “change their state income tax reporting rules to unhook them from federal reporting.”

Looking at a pending case in which a federal judge in Ohio has questioned Ohio’s failure to recognize the marriage of a same-sex couple, Jim Obergefell and John Arthur, who married in another state, however, Davidson also said, “But, as the Obergefell decision suggests, this is just going to prompt more litigation.”

Davidson pointed out that, in addition to Ohio, there are federal lawsuits by same-sex couples seeking marriage recognition pending in federal courts in Arkansas, Kentucky, Louisiana, Nevada, North Carolina, Oklahoma, Pennsylvania, South Carolina, Utah and Virginia and state lawsuits pending in Arkansas, Kentucky, Illinois, New Jersey, New Mexico and Texas.

Tax time and total confusion

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)

Legal marriage may matter most when it’s over

Yes, I know that you and your beloved plan on being together until death do you part. And no doubt many of you will make it there. But some of you lovebirds will squabble over worm and want to fly in different directions, and when it comes to how to split the nestegg, it matters very very much whether the IRS recognizes your marriage.

Robert Wood, writing for Forbes, gives us a few examples.

In fact, the biggest tax issues often come up on the unraveling of a marriage. Whether a couple is heterosexual or gay, the tax aspects of unraveling a relationship are very different inside and outside marriage. You might be shocked how these tax rules work.
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A divorcing couple can divvy up property tax free. Again, there’s no limit. So if you jointly bought a house, you can transfer your interest to your ex without tax.

Not married? In that case, you’ll likely face income or gift taxes. If you give your half of the house to your ex-partner and receive nothing in exchange, you’ve made a taxable gift.

Suppose you’re not feeling that generous and instead are deeding your half of the house to your ex in exchange for some of your ex-partner’s stock holdings? Then you both could be hit with income taxes.

I wish this information were more central to our arguments over equality. Most folks find it surprising when we point out that not only are we denied protections and rights by our government, but we pay far more taxes then they do for the few we get.

Who knows, perhaps those who so oppose our rights on “moral grounds” might find tax inequalities an argument they could consider. After all, it was in the context of paying taxes that some fellow once said, “Give Caesar what is Caesar’s, and God what is God’s”

Google to compensate for “Gay Health Insurance Tax”

The gay health insurance tax is such an odd, unfair, and blatantly discriminatory tax that many heterosexuals have difficulty understanding it – or even believing that it exists. Here’s how it works:

Suppose Joe and Susan are married. Joe has a job with great benefits and Susan works part time as a freelance artist so they take advantage of Joe’s health plan to cover Susan and their two children. The company pays the premiums and everyone is happy.

But if Joe is Janet, the rules change. Janet works at a great company which does not discriminate between gay and straight couples. It recognizes her marriage to Susan and provides health coverage to Susan and their two children just as it would if Janet were Joe.

But now the federal government pops its head in to object. For tax purposes, family benefits are not considered part of your taxable income. Unless you are a same sex family, in which case the federal government says that you are not a family at all. If you are a same-sex couple then you have to pay the Gay Health Insurance Tax.

“Susan is not a relative,” they say. “She’s just some random stranger who is being covered by your health plan. And these kids are her children, not yours.” So, as Susan is not Janet’s spouse according to federal law, they do not treat the health insurance premiums which cover Susan and the kids as family benefits.

“This is income,” they say. Just as any other amount taken from your check and paid to a third party (say a creditor with a lien) is considered part of your income, so too are these insurance premiums paid to cover this other random non-spouse person considered part of your income.

And so they tax Janet. Assuming that Janet is in the 35% tax bracket, her wonderful company may give her coverage for Susan for which they pay premiums of $500 per month, but the IRS gives her a tax bill for $175. So while Joe and Janet may do the same exact work and receive the same exact pay, Joe takes home an extra $2,100 per year.

Now some companies are seeing this as unfair. They support the idea of equal pay for equal work and are stepping in to make up the difference. The latest (and largest) is Google. (NY Times)

On Thursday, Google is going to begin covering a cost that gay and lesbian employees must pay when their partners receive domestic partner health benefits, largely to compensate them for an extra tax that heterosexual married couples do not pay. The increase will be retroactive to the beginning of the year.

This is great news for Google’s gay workforce. But it is also good news for those who work at other companies, especially those with whom Google competes for skilled high tech employees.

But given the competitive nature of the benefits culture in Silicon Valley, where companies often offer extra perks to attract top employees, Google’s decision could lead to policy reviews, experts said.

“It could have a ripple effect, prompting other employers, and particularly employers in the same industry, to take a look at their own benefits package and see whether it would be appropriate to extend those benefits,” said Kathleen Murray, principal in the health and benefits consulting business in San Francisco for Mercer, the consulting firm. “When you have a high-profile company doing anything, that tends to get into the mind of the culture, and it can have a more diffuse effect.”

And as more companies begin to recognize the special gay health insurance tax levied specifically at gay couples, the more the public becomes aware of this bizarre inequality and the easier it becomes to get it changed. A provision which would eliminate the tax was at one point part of the health care reform but did not make it to the final bill.

It seems that some of our representatives believe that gay people should pay higher taxes than heterosexuals. Ironically, they are the ones that you often hear calling for tax cuts… just not for us.

God hates jointly filed tax returns?

The New York Democratic leadership is at war. With itself. Again.

This time Governor Paterson and the legislature are battling over control of the state’s budget. Paterson, a Democrat, is vetoing spending and tax hikes while the House and Senate, led by Democrats, fear that Paterson’s methods will set a precedent that will shift power to future governors. And as the Democratic Party holds a very narrow majority in the Senate, any defections can turn the whole thing over to Republicans in the Senate to advance their spending priorities.

So Ruben Diaz, one of the less ethical players in Albany, has taken opportunity of the situation and threatened to deny his vote to Democrats in the legislature unless he be allowed to dictate tax policy for gay couples.

Same-sex marriages conducted in New York State are not recognized. However, if another state allows same-sex marriage, then New York will honor and recognize that marriage. Thus, those who marry in Connecticut, Vermont, Massachusetts, New Hampshire, Washington D.C., or Iowa can return home as a happily married couple.

But that doesn’t mean that all things are equal. For example, couples do not have the right in the State of New York to file a joint tax return. The state says, in effect, “Yes, we recognize that you are a married couple, but lie and tick the “single” box and pay the higher tax rate.”

So Assemblyman Daniel O’Donnell proposed an amendment to the appropriations bill to allow legally recognized same-sex married couples to file their state income taxes in exactly the same manner as opposite sex couples. Well that was just too much for Senator Diaz.

Because Diaz answers to his God. Or his ego… which might be the same thing. But anyway, his theocratic impulses tell him that God wants gay people to pay higher taxes.

“That’s something I’m not comfortable with and we are working on it,” said Sen. Ruben Diaz Sr., concerned about a provision allowing married same-sex couples to file joint tax returns. “Right now we are working something out….we have 32 Democratic senators. Next year we may have 34. We might have 30. Next year things might change. As long as we have 32, as long as we have 32, each member should be respected.”

Earlier, Diaz Sr. stormed out of conference saying “stupid, stupid, stupid.” A few minutes after saying the above, he said he had the provision excised from the budget bill.

As usual, the leadership caved to Diaz.

The IRS changes tax rules to recognize CA same-sex relationships

For several years, California law has treated couples in domestic partnerships exactly the same as marriages, including in how income tax returns were filed. But the federal government’s DOMA has banned any recognition of same-sex couples as married and the Internal Revenue Service has treated them as though they were two unrelated individuals. This has resulted in the peculiar situation in which a couple files as married for state tax purposes, and then files separate federal returns in which each reports their own individual incomes and deductions.

While it is not true in all cases, quite often this results in same-sex couples paying much higher rates of federal income taxes than they would if they could file jointly, especially when one spouse earns significantly more than the other. It has also resulted in increased time and expense in complying with income tax return preparation.

Now the IRS has issued a memorandum revising its position on the reporting of income from domestic partnerships in California and providing an interpretation that will result in returns that are both easier to prepare and file and also which are more fairly taxed.

Because California is a community property state, and because individuals in domestic partnerships have, since January 1, 2007, had a community property claim on the earned income of their partner for both property law and state income tax purposes, then therefore the IRS has concluded that earned income by either is the joint property of both and should be reflected as such on federal income tax returns.

By 2007, California had extended full community property treatment to registered domestic partners. Applying the principle that federal law respects state law property characterizations, the federal tax treatment of community property should apply to California registered domestic partners. Consequently, for tax years beginning after December 31, 2006, a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return.

This ruling is required in 2010, and couples may also opt to revise returns for 2007, 2008 or 2009. There are some open questions about non-community property and the treatment of certain deductions as well as variances in state law, so see your tax accountant or attorney for further clarification.

This is very good news for our community.

Many gay couples may find that this will offer a significant tax savings next April. And all of us benefit when our governmental institutions begin to recognize our relationships.