The Treasury and IRS issued the much anticipated Revenue Ruling 2013-17 and Notice 2013-61 providing guidance for taxpayers and employers on the implementation of the Supreme Court’s Windsor decision. The ruling provides protection and certainty to same sex married couples by recognizing the marriage for federal tax purposes as long as the marriage is performed in a recognition jurisdiction, either foreign or domestic. So basically, as long as the couple was legally married, that marriage will be recognized in the United States for federal tax purposes regardless of where the couple is domiciled. The big news? A legally married same sex couple can move anywhere in the country and have their federal filing status protected. However, the ruling does not recognize civil unions or registered domestic partnerships as marriage equivalents.
For married SSC’s, there was a small window provided to file returns as single or head of household until September 15, 2013. Since we are post that date, all returns for any years being filed must utilize a married joint or separate filing status. If a spouse has already filed a return by September 15th, 2013 as single or head of household, they will not have to amend their return to match the filing status of the spouse. Taxpayers may voluntarily amend returns to file married joint or separate to obtain tax savings; this usually works best when there is large disparity of income, passive losses to offset passive income, or capital gains to offset capital losses. Returns cannot be amended solely to recover the income tax on imputed employer provided health benefits without changing the filing status. All items on the return must be amended to reflect the change in marital status.
Returns can be amended as long as the statute of limitations is open, basically three years from the original due date of the return or two years from the payment of tax. Amended returns utilize form 1040X and should include sufficient information to support the numbers on the amended return. Submitting relevant pages from the original, and schedules that may have changed (Schedules A, D, E, etc.,) facilitates the processing of the amended returns.
Chief Counsel’s office did clarify that taxpayers can pick and choose which years to amend and they do not have to be consistent. So 2010 and 2012 can be amended and not 2011. When evaluating whether to amend or not it is important to look at all three years because carry-forwards may be affected; savings in one year may be offset with balances due in subsequent years particularly when carry-forwards are utilized in earlier years.
We have started to see movement from the IRS on the protective claims. We have received calls from the IRS directly (we always submit a Power of Attorney form) and in some cases, response letters have been received asking us to communicate back as soon as the relevant issue is resolved. Now that there is guidance and IRS training on this issue these protective claims and amended returns should be processed more efficiently.
The IRS has also issued guidance on the recovery of employment taxes paid on the imputed employer provided health benefits. It is preferable for the employer to try and obtain a refund of both the employer’s and employee’s Social Security and Medicare tax. Notice 2013-61 provides guidance for employers. In the case that the employer will not file a claim, the employee can do so on form 843. The suggestion is to file the form with adequate documentation of the imputed income and a statement that the employer is not filing to recover the employment taxes. Each year requires a separate form. To file a claim for employment taxes you do not have to amend the return to a married filing status, the two filings are considered separate.
On the estate tax side, for those couples that have filed gift tax returns, for what is now considered a spousal transfer, these returns should be amended if the statute of limitations is still open. This will replace the amount utilized from the $5.25 million lifetime exemption. Since 2010, there is portability with respect to the lifetime estate exemption, which means any unused exemption by the first spouse to die can be transferred to the surviving spouse. That means, at a maximum, $5.25 million can turn into $10.5 million for the surviving spouse. To preserve this portability the estate returns must be timely filed.
Post September 16, 2013 employers must comply with the federal guidelines with respect to employee benefit plans. Health insurance plans must be modified as needed so that income is no longer imputed for same sex married couples. Guidance was outlined in Notice 2013-61 relative to the efficient refund to employees of taxes withheld on the imputed income for these benefits for the 2013 year. If payments for spousal health benefits are paid out of a cafeteria plan, these need to be accounted for on a pre-tax basis.
Retirement plans may also need to be amended. Qualified plans must treat all legally married same sex couples the same as legally married different sex couples in order to be in compliance with federal regulations. Irrespective of whether the couple is domiciled in a recognition state or not the federal rules will apply. This is great news for employees. It is still unclear how corrections to prior retirement plan operations will be handled, since amended returns cannot be filed for prior years due to qualified plan issues. It is expected that the IRS will issue additional guidance on these matters with updates to their FAQ.
Stay tuned…
