What This All Means for You, Our Client
Since the Supreme Court ruling, I have been asked by my clients numerous questions about both the benefits and disadvantages for SSMC’S in relation to financial planning and tax preparation, now that section 3 of DOMA has been declared unconstitutional. What follows is a list of some important benefits of the ruling followed by the realities of filing jointly and considerations for filing amended returns:
Some Immediate Financial Benefits for SSMC’S Residing in DC and Marriage Equality States
• Married spouses may pass unlimited amounts of money to each other without paying income tax or incurring gift tax.
• Titling of financial accounts is now simplified, as well as consolidation of those accounts.
• For Estate Planning purposes, married SSMC’S’s can use the unlimited tax marital deduction, and can elect portability, so at death, unused estate and gift tax exemptions can pass to the surviving spouse.
• Tax free employer health insurance benefits now cover both spouses equally, without additional imputing of income and tax payments.
• Spousal health care expenses can be reimbursed from flexible spending accounts.
• SSMC’S now qualify for each other’s Social Security survivor and death benefits.
• Spousal provisions – such as IRA pay-ins for non-working spouses, annuities, rollover opportunities and other retirement accounts are now available to SSMC’s.
Realities of Filing Jointly
• Filing jointly may produce less tax, especially if spouses have disparate income levels or there is a stay-at-home spouse.
• Conversely, higher income two-earner couples or those with children may have to pay more to the IRS.
• Filing joint returns may increase income and result in disallowance of certain deductions or losses that are limited by total income reported on the return (rental losses, IRA contributions, etc.).
• SSMC’S filing tax returns in multiple states may run into additional filing issues, particularly if income is earned in a non-recognition state.
Considerations for Filing Amended Returns
• All the issues of filing jointly stated above apply.
• Keep in mind that when amending returns, the filing status must be either Married Filing Jointly (MFJ) or Married Filing Single (MFS), and all items must be corrected. For example, returns cannot be adjusted only for imputed health benefits, per se, but must be adjusted for all applicable items.
• Couples who cross adopted their children and claimed a federal adoption credit would face recapture of that credit on a joint return.
• Transactions that may have been entered into by same sex spouses which were treated as “unrelated” transactions, due to attribution rules, may be disregarded, which could have significant adverse tax effects.
• When amending returns, carry-forwards (passive losses, capital losses) may be affected, which in turn affect tax liabilities in future years. Even though penalties may be waived, it is not uncommon to get mired in correspondence with governmental agencies to waive the penalties.
• The cost to process the amendments versus the refund should be considered.