The U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) yesterday ruled in Revenue Ruling 2013-17 that same-sex couples, legally married in a jurisdiction that recognizes their marriage, will be treated as married for federal tax purposes. The ruling applies even if the couple lives in a jurisdiction that does not recognize same-sex marriage. In other words, Treasury and the IRS have adopted a "state of commitment" (sometimes referred to as “state of celebration” or “state of solemnization”) approach for the treatment of same-sex marriages.
The ruling implements the federal tax aspects of the Supreme Court's June 26, 2013, decision in United States v. Windsor, which invalidated a key provision of the federal Defense of Marriage Act (DOMA). Under the ruling, same-sex spouses will be treated as married for all federal tax purposes. As a result, the terms “spouse,” “husband and wife,” “husband,” and “wife” include individuals of the same sex who are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, and employee benefits.
While any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be recognized by the ruling, the ruling does not extend such recognition to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law. This ruling also does not affect the positions that may be taken by other federal agencies.
This ruling will be applied prospectively beginning September 16, 2013. Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations. Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.
Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on how qualified retirement plans and other tax-favored employee benefit plans and arrangements should treat same-sex spouses for periods before September 16, 2013. Such guidance will take into account the potential consequences of retroactive application to all taxpayers involved, including the plan sponsor, the plan or arrangement, employers, affected employees, and beneficiaries. It is expected that the future guidance will provide sufficient time for plan amendments and any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise qualify.
The September 16 effective date does not leave much time for adjustment. Although future guidance on this subject may offer some transitional relief to employers, employers should be considering and implementing appropriate changes in payroll systems, notices, benefit elections, and other matters to reflect the new rule.