The Department of Treasury and IRS Recognize All Legal Same-Sex Marriages

by K&L Gates LLP
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On August 29, 2013, the U.S. Department of Treasury and Internal Revenue Service (“IRS”) issued Revenue Ruling 2013-17 providing that legally married same-sex couples will be treated as married for Federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that permits or recognizes same-sex marriage. This ruling implements Federal tax aspects of the June 26, 2013 Supreme Court decision, U.S. v. Windsor. In Windsor, the Court invalidated Section 3 of the 1996 Defense of Marriage Act (“DOMA”), which recognized “marriage” as only a legal union between a man and a woman for purposes of Federal law.

Related Frequently Asked Questions were also issued to provide additional information that reflect the holding in the Revenue Ruling and highlight areas in which future guidance will be issued.

In Rev. Rul. 2013-17, the IRS held, for Federal tax purposes:

  • That the terms “spouse,” “husband and wife,” “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law,[1] and the term “marriage” includes such a marriage between individuals of the same sex.
  • A marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex will be recognized even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.
  • The terms “spouse,” “husband and wife,” “husband” and “wife” do not include individuals (whether of the opposite sex or same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and “marriage” does not include such formal relationships.

Prospective and Retroactive Application of Ruling
The holdings of Rev. Rul. 2013-17 are to be applied prospectively beginning September 16, 2013. Affected taxpayers must comply with the ruling for original returns filed on or after September 16, 2013. Affected taxpayers may, but are not required to, amend income tax returns filed before September 16, 2013 if the statute of limitations on the return remains open. Generally, returns remain open for 3 years from the date the return was filed or 2 years from the date the tax was paid, whichever is later. As of the date of this guidance, returns for the 2010, 2011 and 2012 taxable years generally are still open.

Affected taxpayers may also rely on the holdings retroactively for original returns, amended returns, adjusted returns or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage or fringe benefits that were provided by an employer and are excludable under the Code based on an individual’s marital status. Further guidance is to be issued addressing retroactive application to other employee benefit plans, including qualified retirement plans.

Frequently Asked Questions (“FAQs”)
The IRS also published FAQs pertaining to Rev. Rul. 2013-17, with the following additional information:

Filing Issues for Individual Income Tax Returns 

  • For years beginning in 2013, same-sex spouses generally must file Federal tax returns using a “married filing separately” or “married filing jointly” filing status.
  • A same-sex spouse cannot itemize deductions if his or her spouse claims a standard deduction.
  • If the taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, the adopting parent taxpayer cannot claim an adoption credit.

Dependent 

  • A taxpayer’s spouse cannot be a dependent of the taxpayer.
  • If the same-sex spouses have a child that qualifies as a “child” under applicable Code sections, either parent, but not both, may claim a dependency deduction for the qualifying child.

Claiming a Refund - Employee

  • If an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee can file an amended Form 1040 reflecting the employee’s status as a married individual to recover Federal income tax paid on the value of the health coverage for the employee’s same-sex spouse for all years for which the period of limitations for filing a claim for refund is still open. 
  • Similarly, subject to the statute of limitations, if an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, the participating employee may file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for health coverage for that employee’s same-sex spouse. 
  • Claims for refunds of over-withheld income tax for prior years generally cannot be made by employers.

Claiming a Refund - Employer

  • If the period of limitations for filing a claim for refund is open, an employer may claim a refund of, or make an adjustment for, any excess Social Security taxes and Medicare taxes paid on amounts included in an employee’s income due to employer-provided health coverage for the employee’s same-sex spouse. (See Instructions for Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.)
  • The IRS expects to establish a special administrative procedure to facilitate refunds or adjustments of excess Social Security taxes and Medicare taxes.
  • Employers cannot claim a refund or make an adjustment of income tax withholding that was withheld from the employee with respect to benefits in prior years; rather, the employee may file for any refund of income tax due for prior years on Form 1040X, provided the period of limitations for claiming a refund has not expired.
  • Employers may make adjustments for income tax withholding that was over-withheld from an employee in the current year provided the employer has repaid or reimbursed the employee for the over-withheld income tax before the end of the calendar year.

Qualified Retirement Plans

  • Qualified Retirement Plans are required to comply with the rules of Rev. 2013-17 as of September 16, 2013.  Future guidance is to be issued addressing (1) plan amendment requirements (including the timing of any required amendments) and (2) any necessary corrections relating to plan operations for periods before future guidance is issued.

Practical Implications of Rev. Rul. 2013-17

2013 Impacts for Welfare Plans

  • Income may not be imputed for federal tax purposes for coverage of same-sex spouses in 2013.
  • Income currently being imputed for federal tax purposes on a pay-period basis for coverage of same-sex spouses should stop effective September 16, 2013 (if administratively possible).
  • Same-year adjustments to income previously imputed in 2013 should be applied to the extent possible to correct over-withholding of federal income taxes and overpayment of payroll taxes (to the extent permitted by normal same-year adjustment rules).
  • Open enrollment materials and other fall communications should be reviewed to reflect the Treasury guidance.
  • Employers should determine whether to file a refund claim of any excess Social Security taxes and Medicare taxes paid on imputed income for coverage of same-sex spouses.

Corrected W-2’s for Years Before 2013

  • The guidance does not require employers to issue Form W-2c’s back to 2010 to employees for whom income was imputed due to welfare plan coverage for a same-sex spouse. The guidance seems to imply that employees filing for a refund for prior-year withholding on the cost of coverage for a same-sex spouse know the total amount imputed for the year and/or puts the burden on the employee to figure it out. 
  • Employers may want to consider how much help they will provide to employees filing for refunds.

Evaluation of Qualified Plan Provisions and Benefits

  • Employers should determine the extent to which benefit design changes are necessary or desired (e.g., make a domestic partner the default beneficiary of an unmarried participant who does not designate any other beneficiary).
  • Participant communications (including SPDs, notices and distribution forms) should be reviewed for conforming changes.

Validation of Marital Status

  • Employers should reconsider their existing procedures relating to validation of marital status for both opposite-sex and same-sex marriages as well as domestic partner and civil union relationships.
  • Employers will need to establish an ongoing process to stay abreast of changes to state laws regarding the validity of same-sex marriage.

Continued Application of State Tax Law

  • The Treasury Department guidance does not impact the application of state tax law (except to the extent that a state’s tax law incorporates or follows federal tax law).
  • Employers will need to continue to apply applicable state tax withholding and other income tax rules.

Notes:

[1] Under the Revenue Ruling, “state” means any domestic or foreign jurisdiction that has the legal authority to sanction marriages.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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