The tax laws for same sex couples have been and continue to be confusing. Yet, for those of us advising these clients, we must be informed and clear on the topic – and that means we need to alert them to the possibility of filing amended tax returns.
To get the perspective, let’s look at the history:
· Before Registered Domestic Partners (RDPs) or Same Sex Marriages (SSMs) – The partners were treated as legal strangers to each other. Each were required to file as single (or head of household) reporting their own income and deductions for both Federal and State purposes.
· RDPs & SSMs pre-2011 – Although same sex partners (or spouses) were still treated as legal strangers for Federal purposes, States recognizing this status allowed couples to file as married with either joint or separate returns. Thus, couples were forced to file as single for Federal purposes and as married for State purposes.
· RDPs & SSMs post-2010 – The IRS, in its infinite wisdom, decided that RDPs and SSMs in community property states were required to report income and deductions as community property on Federal tax returns – even though each partner (or spouse) was still required to file as single. So, the puzzle became even more complicated! Consequently, couples in community property states still filed as married for State purposes, with each partner required to file as single for Federal tax purposes – reporting half of their own and each other’s income, deductions and withholding! Essentially, four returns were required – 1) a State joint return, 2) a “fake” Federal joint return that would be used as the basis for splitting all of the numbers (with this schedule attached to each single return), and 3&4) a single Federal return for each partner. This new twist even confused the IRS! Many RDPs and SSMs found that the IRS did not know how to split withholding and, in turn, they received erroneous refund checks for one partner and big tax bills for the other! To further complicate things, the IRS gave couples the right, but not the requirement, to amend returns for prior years to reflect the community property splitting. This meant that after all the difficulties of filing prior years’ tax returns, the couple needed to recalculate their taxes to determine if amending would be beneficial or not!
· RDPs & SSMs post-2012 – With the repeal of DOMA, State tax laws remain unchanged; however, the IRS must now recognize the legality of state sanctioned SSMs. Note that this only applies to married couples, not RDPs. This means that SSMs must now file as married for Federal purposes. The good news is that SSMs will now only have to prepare two joint tax returns – one for Federal and one for their State. But, SSMs face complexity once again: the IRS is allowing SSMs to amend prior open tax years. So, now couples need to recalculate taxes in a different way to determine if amending would be beneficial or not.
In my firm, if we prepared their prior tax returns, we will amend prior years’ tax returns (Them) for SSMs for free. We think they’ve already been through enough.