August 27, 2012 / 7:01 PM / 6 years ago

Newly married gay couples face tax landmines

NEW YORK (Reuters) - While most tax news in this election cycle is focusing on expiring tax cuts, what may be most revolutionary about 2012 is how many newly married same-sex couples are going to face a tax quagmire.

Shawn Klein smiles during his marriage ceremony to Phil Fung, his life-partner of 18 years, on the 61st floor of the Empire State Building in New York February 14, 2012. REUTERS/Andrew Burton

There are more than 130,000 married gay and lesbian couples in the United States, according to U. S. Census Bureau data. And with more states, notably New York, legalizing same-sex marriage, that number is rising.

Taxes for same-sex couples are far more complex than those for heterosexual couples because the 1996 Defense of Marriage Act (DOMA) prohibits same-sex marriages from being recognized at the federal level, while state-level tax rules vary greatly.


Because of DOMA, you can’t file your federal income tax returns jointly, even if you are married by state standards. If you or your partner can file as head of household instead of as single, you’ll be able to get a greater standard deduction - $8,700 in 2012, vs. $5,950 for single - and better tax rates.

To qualify, you need to cover more than half the costs of the household’s upkeep and have a “qualifying person” living with you - typically a related child. In a lesbian couple where one partner was the biological parent of a child and the other was a breadwinner and not related to the child, neither would qualify.

The same disparity occurs when parents are claiming dependents. A married heterosexual couple simply lists children on the joint return, and accrues tax benefits. However, for gay and lesbian couples with children,there are two problems: They can’t file a joint tax return, and they may not both be legal parents of their children. (Some states allow same-sex adoptions.)

For tax purposes, that means that only the biological or legally-adoptive parent would be permitted to take the exemptions for their children, the child credit and a number of other child-related benefits, including education tax breaks.

If both partners are legal parents, you have more options. In general, the higher earner should claim the dependent if possible.

Same-sex couples can expect higher health-related taxes, too. Generally, health insurance benefits are not taxable and employers deduct the cost of health insurance from your paycheck on a pre-tax basis. But for gay and lesbian couples the benefits for the partner are taxed at the federal level as wage income.


Gay and lesbian couples need to make sure they have explicit estate plans and update their wills often. That’s because the same assumptions about assets going to the surviving spouse don’t hold - and families who didn’t accept the relationship may be more likely to squabble.

For those with greater wealth who may owe the estate tax (currently due on estates above $5.1 million), the big issue is that the rules letting spouses inherit unlimited amounts tax-free does not apply to gay and lesbian marriages because of DOMA.

The recent court decision in Windsor v. United States may change that. Edith Windsor filed suit seeking reimbursement of the $363,053 in federal estate taxes that she paid when her same-sex spouse, Thea Spyer, died and left her assets to Windsor.

In June, the U.S. District Court for the Southern District of New York ruled that Section 3 of DOMA, which limits federal benefits based on marriage to a man and a woman, was unconstitutional in that case, and that Windsor should be repaid the estate taxes plus interest. The American Civil Liberties Union (ACLU) has petitioned the Supreme Court to hear the case and it is one of four DOMA cases that the Supreme Court could choose to hear.

While the case is being appealed, “some CPA firms are filing protective claims to get their clients back money,” says Nanette Lee Miller, a partner at accounting firm Marcum in San Francisco, who heads the firm’s new tax practice focused on non-traditional families. A protective claim would allow a taxpayer to get a refund based on a contingency, such as pending litigation, beyond the statute of limitations.


If you live in a state that recognizes your marriage, such as New York, Massachusetts or Vermont, you’ll file your state taxes as married. But since the state return is calculated from the federal return, and you can’t file federally as married, you’ll first create a dummy federal return in which you are. Some states will want to see that dummy return, while others won’t, so check your state’s requirements.

“The nightmare of compliance is difficult and the cost of compliance will be at least double, and I think you face a greater risk of audit,” says Ken Weissenberg, a partner at accounting firm EisnerAmper in New York, who is in a same-sex marriage with two children.


Lambda Legal, the lesbian, gay, bisexual and transgender advocacy organization, recommends that if you’re legally married you attach a declaration to your federal tax return that notes your filing status is based solely on DOMA, and that you are not disavowing your marriage (or perjuring yourself) by not filing as married.

All these workarounds for same-sex couples would become moot if DOMA is overturned, either legislatively or by the Supreme Court. But since DOMA affects some 1,000 federal statutes, it’s unlikely the financial complexities will go away quickly or easily.

Follow us @ReutersMoney or here; Editing by Linda Stern and Leslie Gevirtz

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