State and Federal Tax Laws conflict with Marriage Equality


Few taxpayers look forward to tax season, but the annual obligation is particularly laborious for tens of thousands of same-sex couples who live in states that recognize gay marriage or civil unions. 
Beatrice Hernandez, left, and Melba Abreu have been married since 2004. They say the prohibition against filing joint returns has cost them more than $40,000 in additional taxes.
  • Mark Garfinkel, for USA TODAY
    Beatrice Hernandez, left, and Melba Abreu have been married since 2004. They say the prohibition against filing joint returns has cost them more than $40,000 in additional taxes.

Mark Garfinkel, for USA TODAY
Beatrice Hernandez, left, and Melba Abreu have been married since 2004. They say the prohibition against filing joint returns has cost them more than $40,000 in additional taxes.
Some have to put together four tax returns. Others have to prepare five. Preparation fees can cost thousands of dollars, and refunds may be delayed for months.
The reason: Most states that recognize same-sex marriage or domestic partners allow couples to file a joint state tax return. State tax returns, though, are based on the taxpayer's federal tax return. And because the 1996 Defense of Marriage Act (DOMA) prohibits the federal government from recognizing same-sex marriage, these couples can't file jointly with the IRS.
To get around this conflict, same-sex couples who want to file joint state tax returns must each complete an individual tax return to file with the IRS. They use information from those returns to create a mock joint federal tax return, combining their income, adjustments and credits, and use that return to prepare their joint state tax return.
"It's really a complicated affair because of DOMA," says Melba Abreu, chief financial officer for a non-profit in Boston. Abreu, 56, and her longtime partner, Beatrice Hernandez, 50, were married in 2004. They file a joint tax return with Massachusetts, Abreu says, but when it comes to their federal tax returns, "Our marital status is completely erased."
As more states recognize same-sex partnerships, the number of couples forced to accommodate contradictory state and federal tax laws will increase. In 2011New Yorklegalized same-sex marriage, so now 11 states and the District of Columbia allow same-sex couples to file joint tax returns.
Monday, Washington Gov. Chris Gregoire signed legislation legalizing gay marriage in that state, which has no state income tax. Lawmakers in Maryland and New Jersey are considering gay marriage bills, and a gay marriage referendum is expected to come up for a vote in Maine in November. Last week, a U.S. appeals court struck down California's ban on gay marriage.
Community property
Nowhere is the task of filing a same-sex tax return more bewildering than in community property states. In response to a court challenge, the IRS said last year that it would recognize community property owned by a same-sex couple, even though it doesn't recognize the relationship that created the community property, says Jean Nelsen, president of the California Society of Enrolled Agents.

Taxing situations

States that allow same-sex marriages, domestic partnerships or civil unions:
StateType of partnership
Allows joint filing of state tax return
CaliforniaCivil union/
domestic partnership
Yes
ConnecticutMarriage
Yes
DelawareCivil union/
domestic partnership
Yes
District of ColumbiaMarriage
Yes
HawaiiCivil union/
domestic partnership
No
IllinoisCivil union/
domestic partnership
Yes
IowaMarriage
Yes
MassachusettsMarriage
Yes
NevadaCivil union/
domestic partnership
No state income tax
New
Hampshire
Marriage
Yes
New JerseyCivil union/
domestic partnership
Yes
New YorkMarriage
Yes
OregonCivil union/
domestic partnership
Yes
Rhode IslandCivil unions
No
VermontMarriage
Yes
WashingtonMarriage
No state income tax
Sources: CCH, USA TODAY research
Among the nine community property states, three — California, Nevada and Washington — recognize domestic partnerships, legal contracts between partners that are honored by businesses, state and local governments.
Because income earned during the year is considered community property, domestic partners who live in these states must split their income, even though they're filing separate federal tax returns.
Tax preparers say the rules, which first took effect last year, have created chaos for taxpayers and tax preparers. The 2011 tax season "was a nightmare," says Cynthia Leachmoore, an enrolled agent in Soquel, Calif. "You were picking things off one partner's return and placing them on another's and attaching a statement explaining what you did."
Making matters worse, same-sex partners who split income and withholdings risk having their returns rejected by IRS computer programs because the numbers don't match the data on their W-2s, says Elisha Wiesenberg, a certified public accountant based in Los Angeles.
The added complexity has made the cost of preparing community property returns for same-sex couples prohibitively expensive, tax preparers say. "I can't charge my full fee to do these returns," Leachmoore says.
In addition, because the couples must attach additional forms to explain how their property has been divided, they can't file their returns electronically. Paper filing, combined with the extra time it takes for the IRS to review the forms, has led to lengthy processing delays, Nelsen says. Some of her clients had to wait 10 months to get their tax refunds last year.
Higher taxes
In addition to driving up the cost of tax preparation, filing separate tax returns with the IRS results in a higher tax bill for many same-sex couples, advocates for gay marriage say.
Abreu and Hernandez, for example, estimate that filing separate federal tax returns has cost them an additional $40,000 in taxes since 2004.
The 2001 Bush tax cuts increased the standard deduction for married couples to twice that of single filers and increased the income range for the 10% to 15% tax brackets to twice that for individuals. This doesn't extend to same-sex couples.
Some same-sex couples could come out ahead by filing separately, particularly if they're in higher tax brackets, says Mark Luscombe, federal tax analyst for tax publisher CCH. Filing separate tax returns also allows same-sex couples to shift income to the lower-earning spouse, although that's not an option in community property states, he says.
But well-off same-sex couples face other tax challenges. A surviving spouse in a heterosexual marriage can inherit an unlimited amount of assets without paying federal estate tax. This exemption doesn't apply to same-sex couples. Similarly, same-sex couples could be subject to gift taxes if they give each other a large amount of money or other assets.
Health insurance costs
In addition, gay workers in all tax brackets face a tax hit when they add a partner to their employer's health insurance plan.
More than 60% of Fortune 500 companies offer domestic partner benefits to their employees. Unlike health insurance provided for heterosexual spouses, though, these benefits are taxable. Employers are required to report the value of the benefits as income to the IRS.
The Human Rights Campaign, an advocacy group, estimates that same-sex couples who take advantage of domestic partner benefits pay an average of $1,500 in additional taxes a year.
"It's an additional financial burden on a household," says Deena Fidas, deputy director of HRC's workplace project. "We have had reports of people who have told us they simply cannot afford the additional tax burden and have been forced to choose between that and covering their partners."
About 30 companies, including Google, Microsoft and Apple, reimburse employees for the additional taxes on domestic partner benefits.
"We decided it was a matter of fairness," says Karyn Twaronite, inclusive officer for accounting firm Ernst & Young, which will start reimbursing employees this year.
Mary Ritchie, 51, a state police lieutenant who lives in Framingham, Mass., doesn't have to pay taxes on health insurance because she claims her partner, Kathy Bush, as a dependent on her tax return. Bush, 52, stays at home to care for their two boys, William, 10, and Ryan, 13.
Nonetheless, Ritchie and Bush estimate that their separate federal filing status has cost them more than $30,000 in additional taxes since they got married in 2004.
"Like every married couple," Bush says, "all that money would really help us.” 

By Sandra Block, USA TODAY





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