The Supreme Court delivered several significant rulings last week, including one requiring all 50 states to recognize same-sex marriages. Prior to this ruling, 37 out of 50 states allowed same-sex marriages to be recognized. The remaining 13, including Michigan, viewed marriages legally performed in other states as if they did not exist. The differing state rules created income tax filing nightmares for those that were legally married in another state but resided in one of the 13 nonconforming states. Although the case before the Supreme Court was not tax related, there are now potential tax implications that should be considered by those who were married before the Supreme Court’s ruling and also by those contemplating a wedding in the near future.
For same-sex couples who are legally married but residing in a nonconforming state, the income tax filing requirements have been very confusing. Most states, including Michigan, required that if a federal income return was filed jointly, then a joint state return was required as well. However, nonconforming states also specifically indicated that same-sex couples could not file joint returns. So, in Michigan, for example, legally married same-sex couples filed a joint federal income tax return, but then were required to recalculate their federal return as if each taxpayer were single. The couple would then use the recalculated returns to file two separate single Michigan returns. The requirements imposed by the nonconforming states created additional time, effort and cost.
With last week’s ruling, the nonconforming states are no longer allowed to have a separate set of rules and must now conform to recognize the marriages in their respective state. For 2015, same-sex couples will be required to file their state return with the same filing status as their federal return. However, each state will need to issue guidance on how to treat prior year returns that are still within the statute of limitations and potentially subject to examination. The prior year returns requiring guidance generally include 2014, 2013 and 2012. With many of the 2014 income tax returns potentially on extension and not required to be filed until October 15, 2015, the states are expected to provide guidance relatively soon.
The marriage penalty is an issue that affects any couple, same or opposite sex, when filing their joint return. In tax terms, the marriage penalty is when the tax on a jointly filed income tax return is more than the combined taxes each spouse would pay if they weren’t married. The biggest cause for this is usually attributed to the higher tax brackets (above 15%) for married filing joint couples that Congress has not adjusted in order to reflect brackets exactly equal to double that of a single taxpayer.
In addition to tax brackets, there are other contributing factors to the marriage penalty, including allowable capital loss deduction amounts, as well as income phaseouts for:
The upside, from a tax perspective, for all married couples includes some breaks in the estate and gift tax area. One such break is the ability to use the marital deduction in order to transfer unlimited amounts between spouses during their lifetime. By using the marital deduction, that would not have been previously available as a single taxpayer, they can avoid having to pay gift tax on those transfers.
Additionally, spouses can maximize gifting to individuals, other than themselves, through the use of gift splitting (i.e., gifts to others are treated as made half by each spouse). And finally, from an estate standpoint, the estate of the first spouse to die will receive a marital deduction for amounts transferred to the surviving spouse and any unused exclusion amounts can be transferred to the surviving spouse.
We Are Here to Help
Please contact our office to schedule an appointment for assistance with the new state tax filing requirements, minimizing effects related to the marriage penalty and your other income, retirement, gift and estate tax planning and consulting needs.
Brett Karhoff, CPA, MST Senior Manager
Phone: (616) 949-3200
Brett Karhoff, CPA, MST is a Senior Tax Manager of Hungerford Nichols CPAs + Advisors. Brett has become an essential advisor for many companies and individuals. He focuses on listening to their concerns, understanding their business and providing timely and proactive ideas to help them become successful. Additionally, he prides himself on helping them “safely” navigate through the complex tax code that currently exists. He provides key ideas and assists with implementing strategies to improve business operations and minimize current and future tax dollars.
Hungerford Nichols is a Tax, Auditing and Business Advisory firm with offices in Grand Rapids and Greenville, MI. The firm is celebrating 74 years of helping closely-held and family-owned businesses in West Michigan.