In our last newsletter we discussed the Supreme Court landmark decision in United States V. Windsor, in which the Court held the terms “marriage” and “spouse” cannot exclude same-sex partners. As a result of the Court’s decision, each state may determine whether or not to permit or prohibit same-sex marriages.

The questions raised by the decision were plentiful, and we noted that, although current Illinois law permits same-sex civil unions, it has yet to permit same-sex marriage, so it was unclear whether partners in an Illinois civil union would be considered married for federal tax purposes. We also noted it was unclear whether legally married same-sex couples would receive equal tax and Social Security benefits in all states, or only in those states that permit same-sex marriages.

After weeks of speculation as to how the Internal Revenue Service would treat same-sex marriages, the U. S. Department of the Treasury and the IRS released a joint ruling which held same-sex couples, legally married in jurisdictions that recognize same-sex marriages, will be treated as married for federal tax purposes. Revenue Ruling 2013-17 (issued August 29, 2013) includes FAQs providing guidance on the topic. The ruling applies whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction – such as Illinois – that does not recognize same-sex marriage. The determining factor is where the marriage took place and if the marriage was legal in that jurisdiction.

In reaching its decision, the joint ruling discussed the IRS’s historical treatment of common-law marriages. Since 1956, the IRS has treated a couple who entered into a common-law marriage in a state that recognizes such marriages as married for federal income tax purposes, notwithstanding that the couple later moved to and resided in a state that does not recognize common-law marriage. This is consistent with longstanding Revenue Ruling 58-66. The IRS acknowledged that, although states have different rules of marriage recognition, a rule under which a couple’s marital status for tax filing purposes could change simply by moving from one state to another, would be close to impossible for taxpayers to follow and the IRS to enforce. Thus, state law could not be permitted to govern whether a couple was “married” for federal tax purposes.

The ruling applies to any same-sex marriage legally entered into in any one of the 50 states, District of Columbia, a U.S. territory, or a foreign country. However, the ruling explicitly does not apply to registered domestic partnerships, civil unions, or similar formal relationships entered into under state law.

The IRS ruling has made it clear legally married same-sex couples will receive equal federal tax treatment in all states, and not only in those states that permit same-sex marriages. For example, if a same-sex couple who is legally married in New York moves to Illinois, where same-sex marriages are not recognized, they will still be deemed legally married for federal tax purposes. Moreover, if the same couple moves to Missouri, where same-sex marriages are prohibited under both state statute and the state Constitution, they remain validly married for purposes of federal tax filings.

2013 Returns

The ruling will apply to all federal tax provisions where marriage is a factor, and for all federal taxes including income, estate and gift taxes. Legally married, same-sex couples must file their 2013 federal returns as a married couple, and have the same filing choices as an opposite sex married couple, including filing status (married filing jointly or married filing separately), personal and dependency exemptions, the standard deduction, employee benefits, contributions to IRAs, the earned income credit, and the child tax credit, to name a few. Of course, this requirement is only for federal returns, and the state law of the domicile of the same-sex couple will determine whether or not they are eligible to – or required to – file as a married couple.

There are in excess of 200 provisions in the Internal Revenue Code and Regulations that contain the terms “spouse, husband, wife,” etc. Under the Revenue Ruling, such terms will be treated as gender neutral.

2012 Returns

The Revenue Ruling will be applied prospectively, effective September 16, 2013. This means if you are a spouse in a legally binding same-sex marriage and you first file your 2012 federal tax return on or after September 16, 2013, you must file as married. If you are eligible and have already filed your 2012 returns separately, you may leave them as filed or amend the returns to file jointly. Taxpayers who wish to rely on the ruling for earlier periods may do so, subject to the information below. It should be noted that the requirement to file jointly applies not only to income tax returns, but also to gift and estate tax returns.

Refund Claims for Prior Year Returns

Legally married same-sex couples are permitted – but not required – to file refund claims for previously filed returns. Since the statute of limitations for filing a refund claim is generally three years, refund claims for tax years 2010 and 2011 (in addition to 2012) may still be filed. Moreover, a legally married same-sex couple may also take advantage of certain gift and estate tax exclusions available only to married couples, and may be entitled to file for a refund of overpaid federal estate or gift tax for the same tax years.

Social Security

Effective August 9, 2013, the Social Security Administration will approve same-sex marriage spousal claims, provided at the time of the application or while the claim is pending, the couple lived in a state where same-sex marriage is recognized.

Open Issues

The ruling is limited to the impact of the Windsor case on federal tax matters, and did not include any guidance as to the impact on federal benefits, such as pensions and Social Security. Although the IRS indicated that guidance as to employee benefits, such as federal pensions, would be forthcoming, no mention was made of forthcoming guidance concerning the impact on Social Security benefits.

The IRS also intends to announce streamlined procedures for employees who wish to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses.

If you are an employer and wish additional assistance, please contact Donna F. Hartl (312) 696-2035 dfhartl@golanchristie.com or Nancy Franks-Straus (312)696-1368 nfstraus@golanchristie.com