IRS Issues Favorable Rules for Same-Sex Married Couples

Filing status checkboxes on IRS Form 1040

Filing status checkboxes on IRS Form 1040Last week the Internal Revenue Service announced new rules for same-sex married couples which say that for Federal tax purposes all couples who enter into legal marriages will be treated equally.  The new policies were needed after the Supreme Court declared the Defense of Marriage Act (DOMA) unconstitutional.

The new IRS policies say that regardless of where the couple is now living, they will be treated as married if they had a legal marriage ceremony.  This means that a same-sex couple that is legally married in California remains married for tax purposes even if they move to Nevada or another jurisdiction that does not yet recognize same-sex marriages.

The IRS rules affect both income tax and estate tax.

The IRS statement was broad.  It specifically covered legal marriages performed in US states, the District of Columbia, and foreign countries that authorize marriage between loving couples, regardless of sex.

In addition, the ruling allows — but does not require — same-sex couples to amend past returns.  This means that taxpayers can calculate whether they would save money if they refiled past returns with a status of “married” or whether they’re better off having filed as single.  Nice!

Starting in tax year 2013 (due April 15, 2014) same-sex married couples will be required to file as married.  And, same sex-couples who have not yet filed their 2012 taxes will have to file before September 16, 2013 if they want to file as single.

Should You File an Amended Return?

If you are in a same-sex marriage you can go back and refile your Federal returns under the married status for any year you were married.  Normally taxpayers can go back three years, refile, and ask for a refund.

For most people, refiling as married may not be worth the trouble or expense. In fact, you may owe more tax as a married couple than you did as two individuals.  But, check out your options.

You Are Most Likely to Benefit from Filing as “Married” …

  • if there is a wide disparity in incomes between the individuals and you live in a non-community property state. If there is a big difference, some of the high-earner’s income would be taxed as a lower rate and the combined taxes may be considerably lower.
  • if one partner provided the other health insurance under an employer’s plan.  Until DOMA was thrown out, the IRS was required to treat the insurance premiums for same-sex spousal health care as taxable income.  Now, the premium dollars are not taxable.

You Are Most Likely to NOT want to Refile…

  • if you now each take deductions — such as those for losses on actively managed rental property — that are limited per tax return. For example, two single people who co-owns rental property can claim $50,000 a year in losses, $25,000 each return.  A married couple can only claim $25,000.
  • if you take deductions — such as those for deductible IRAs — that phase out at specific income levels when your combined income will drive the couple’s income over the married limit.  The married phase out level is often lower than twice that of a single filer.

If you have a simple return and use a commerical software program, figuring out whether you should file an amended return should cost you only the time that it takes to enter your financial information as a married couple.

If you have a more complex return, talk to your CPA for his or her opinion on your likely savings.  You may be able to find out in a phone call if it’s likely that that there’s enough money at stake to cover the cost of a professional redo of your return, or you accountant may have to do some calculations for you.

Even if it isn’t cost effective to go back an amend past years returns, future tax returns will be much easier to complete in community property states like California.  Currently, we have to create four returns (including two dummy Federal returns) for same-sex married couples. Next year for married couples filing jointly it’ll be just two: Federal and State.

Talk to your tax professional, though, to see if you may wind up paying more becasue of limits on deductions.  You don’t want to be surprised next April.

The Worst and Best Things to Do When the IRS Writes

A lot of people are coming into our office this year because they’ve been contacted by the IRS and they want help.

Many new clients have assumed that they’re being audited by the IRS as soon as they saw the envelope in their mail box.  The “Official Business” look intimated them.

Several business owners and individuals I’m working with simply didn’t open the mail from the IRS.  It’s like they thought the IRS would go away if they didn’t read the letter.

That’s the worse thing you can do:  Leave the IRS notice unread! 

  • Many IRS letters are minor administrative corrections to your math.  Some of these corrections actually result in you getting money back!
  • Even dreaded IRS audit notices or other correspondence questioning what you’ve done are better read and dealt with.
  • In most cases the IRS letter asks you to respond by a certain date.  If you miss  deadlines, the IRS will simply decide that their worst-case assumptions are correct, and they’ll take steps to get the money they think you owe them.  You or your representative need to talk to the IRS before the deadline — even if all you say to them is that you need to extend the deadline!

Man with IRS ProblemsSome clients first called us when the response date  in the letter is a week or less away!  That gave them and us no time to prepare to meet with the IRS.  Fortunately, the IRS has been flexible in rescheduling meetings and examinations.  We’ve even had some success postponing or reversing asset seizures for tax payers who blew past all deadlines and completely ignored the IRS mailings.   Of course, begging the IRS at the last minute is nerve-wracking, not always successful, and more time consuming than responding in a more relaxed way.

Dealing with the IRS is usually straight forward.

The best thing to do is open the notice right away and discover what you’re dealing with. 

Why open the envelope ASAP? Well, if the IRS is correcting your addition and sending you $100, you want to find that out right away.  If there is a small correction the other way, you’ll sleep easier knowing that the matter is minor.

Even a full-blown IRS audit is survivable.  Most IRS agents are focused on doing their job correctly, and they respond well to a clear, logical presentation of facts.

But, open the IRS envelope! If you have to respond to the IRS, give yourself and the professional you engage time to present your information in the best possible light.

We have some more IRS audit tips and FAQ answers online.  If you have more questions post them here, or phone us at 415.433.4500 if you want a more private conversation.