Same-Sex Marriage Bans and Tax

December 21, 2013 | 7 comments
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District-UtahThe District of Utah has had a busy week. As I’m sure you heard (and if you haven’t, you ought to read Kaimi’s post first), Utah’s ban on same-sex marriage has been struck down as unconstitutional. A week ago, in the wake of the decision that didn’t actually legalize polygamy, I looked at the potential tax consequences of that decision and, fairly anti-climatically, determined that there were none. Plenty of electrons will be spilled going over this decision but, again, I suspect that the tax consequences will be underexplored. And (spoiler alert!) this time, there are (fairly consequential) tax consequences to those who have married and to those who plan on marrying.[fn1] And what are they? Let’s explore in a Q&A format![fn2]

So what are the tax consequences of same-sex marriage in Utah?

Don’t you think that’s a little broad?

Okay, how about this: what happens, for federal tax purposes, when a same-sex couple gets married?

Much better. Prior to this summer, nothing. DOMA prevented the federal government from recognizing same-sex marriages for any federal purpose. Then, this summer, the Supreme Court decided Windsor, which held that section 3 of DOMA (the section that prevented the federal government from recognizing state-sanctioned same-sex marriage) was unconstitutional. Today, then, if you’re married for state purposes, you’re married for federal purposes.

Which means that those individuals who got married yesterday will have to file their federal tax returns either as married filing jointly or married filing separately.

Wait, but what about the fact that the marriage is only happening in late December?

For tax purposes, whether you get married on January 2 or December 31, 2013, you have to file your 2013 return as married.

So how do I pick between filing jointly or separately?

You’re probably going to file jointly. There are a handful of reasons to file separately (like if you really, really don’t want to mingle your assets, or you really, really don’t trust your spouse—seriously), but the marginal tax brackets are higher for joint filers than separate filers.

For tax purposes, am I better of marrying or staying single?

First: I suspect that very few people choose between marrying on living together unmarried solely (or even largely) for tax purposes. But getting married affects the total amount of taxes two people pay; in some circumstances, it increases those taxes, while in others it decreases them.

As a general rule, if two people earn roughly the same amount of income, they’ll pay less in taxes by not marrying, while if one earns significantly more than the other, they’ll pay less in taxes by marrying.

That seems kind of weird. Can you illustrate it for me?

Sure. Let’s imagine two Utah couples who are contemplating getting married. Couple 1: Adam and Ben. Each earn $75,000.[fn3] Couple 2: Cathy and Diane. Cathy earns $150,000 and Diane earns $0.

I see what you’re doing.

What? Alphabetizing their names?

Yeah, but also, each couple earns $150,000 between them.

That’s right.

So, for 2013, here are the tax brackets for married filing jointly and unmarried individuals:

2013-Tax-Rates

 

 

Unmarried, Adam and Ben will each owe $14,678.75 in taxes, for a joint tax liability of $29,357.50. If they marry and file jointly, they will instead owe $29,465.50. Marrying in 2013 cost Adam and Ben an additional $108 in taxes. (This is called the “marriage penalty.”)

In the case of Cathy and Diane, if they do not marry, Diane will owe nothing in federal income taxes (because she had no income in 2013). Diane will owe $35,293.25. If they get married, though, their joint tax liability drops to $29,465.50. Marriage lowers Cathy and Diane’s joint tax bill by $5,827.75 (the so-called “marriage bonus”).

Okay, but all of this also applies to opposite-sex couples who get married.

Yes.

Right, and I get that it’s new for the people of Utah, but are there any same-sex-marriage-specific tax consequences?

A couple. First, there’s the issue of what happens if Adam and Ben get married in Utah in 2013 and then, in 2014, move to Idaho, which doesn’t recognize same-sex marriage. In determining whether they’re married for federal income tax purposes, do Adam and Ben have to look to the state of ceremony or the state of domicile?[fn4]

The I.R.S. decided to look to the state of ceremony.[*] That is, Adam and Ben will not effectively become unmarried for federal income tax purposes by virtue of moving to a state that doesn’t recognize their marriage.

But what if they do become unmarried? Utah’s Acting Attorney General is asking the court for a stay of its decision, noting that, if the 10th Circuit overrules the district court, “the licenses issued [to same-sex couples] and the [same-sex] marriages performed in the absence of a stay may be void.”

While I’m dubious that a reversal of the decision would void marriages that had already been performed, let’s assume that the 10th Circuit does reverse and that it voids the same-sex marriages performed yesterday. What, then, are the tax consequences to those individuals?

I don’t know. The I.R.S. didn’t anticipate the question when it decided how to apply Windsor. I guess that, if the 10th Circuit were to say that the marriages had never happened, and were void ab initio, there would technically be no state of ceremony on which to base joint filing. 

Such a final decision, though, will probably not happen in 2013 (or, probably, before the 2013 tax filing season, which begins on January 31, 2014). Which means that a same-sex couple that got married yesterday will probably have to file their 2013 returns as married. If the court of appeals voids their marriage, query whether the I.R.S. will (a) require them to file separately going forward, and (b) will require them to file an amended return for 2013.

[fn1] Note that most of these consequences also apply to opposite-sex marriages. So you can treat this as a primer on the tax consequences of marriage, period.

[fn2] Caveat: this is purely informational, btw, not legal advice. I don’t know if any non-wealthy person in the history of ever has sought tax advice in advance of marriage but, if you’re thinking about getting married and want to know the specific tax consequences to you, I strongly urge you to seek advice from a competent tax advisor.

[fn3] Assume that all of the money is taxable income, rather than gross or adjusted gross income. Basically, that means assume that there are no remaining deductions that they can take. That just makes doing the math simpler.

[fn4] This isn’t an issue for opposite-sex marriages because every state currently recognizes opposite-sex marriages performed in another state.

[*] In an earlier version, I accidentally typed “state of residence.” I’ve corrected the text.

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7 Responses to Same-Sex Marriage Bans and Tax

  1. JasonB on December 21, 2013 at 4:24 pm

    It’s probably time to get rid of the marriage penalty/benefit and simplify the tax code. Think of how much time and energy is wasted contemplating the code’s minutiae and how society would benefit if great minds like yours devoted time and effort to solving more important problems

  2. jks on December 21, 2013 at 4:44 pm

    JasonB, get ride of the marriage penalty/benefit? People swore up and down that other people’s SSM and other people choosing not to marry will never affect my marriage or my kids’ marriage. What a lie.
    We are a traditional family. In some ways the tax code has been made to help married couples and help raise kids. Getting rid of it is another nail on the coffin of the traditional family and having kids in general.
    You can say that the tax code is too complicated, but I say the traditional family simplifies things. It is incredibly simple for each child to have two parents loving and providing and the traditional family very often negates the need for complicated governmental programs like welfare, federal housing, food stamps, medicaid, etc.
    As for time devoted to minutae. Some people just like numbers. Nothing wrong with thinking about them and explaining them to other people. Taxes really aren’t that complicated for people who understand numbers and I am surprised at how much my friends are willing to avoid thinking about their budget, their debt, their retirement, and their taxes because they can’t handle numbers. Some people want to understand and appreciate when other people explain financial matters so they can make informed financial decisions.

  3. Lorian on December 21, 2013 at 4:56 pm

    jks, don’t go blaming the libertarian thang about getting rid of marriage tax benefits on gay people getting married. I certainly don’t want to get rid of it. My family benefits from that tax break, too, you know. Or at least, we do *now* that DOMA was finally overturned. Prior to that, my wife and I had to file as unrelated single adults, despite the fact that I’m a SAHM and we live mostly from her income.

    I’m so grateful my family can finally fully benefit from filing jointly as the married couple we are.

  4. sterflu on December 22, 2013 at 10:02 pm

    Thanks for the analysis. If it helps, you might want to look at the same-sex marriages that happened in New Mexico for one day in 2004. The quasi-legal status of those couples sort of speaks to your question about what happens if the state of Utah prevails with their appeal.

  5. Sam Brunson on December 22, 2013 at 11:16 pm

    Thanks, sterflu. That would be interesting from a legal perspective (were the NM marriages treated as void?). For federal purposes, though, DOMA would have prevented the couples from filing as married.

    Even if DOMA hadn’t been there, though, I suspect that the Utah question would be more interesting (and more difficult). Marital status is determined as of the last day of the year. So, for example, if you get married on Dec. 31, 2013, you file as married for 2013. Similarly, if you get divorced on Dec. 31, you file as single for the entire year. Here, though, it looks like the marriages will continue at least through the beginning of next year. So it they’re invalidated after the filing deadline, then we need to figure out the tax consequences, both for the 2013 return (does it need to be amended) and going forward.

  6. Zachary Martinez on December 23, 2013 at 7:32 pm

    Sam, when you said “The I.R.S. decided to look to the state of residence”, surely you meant to say “state of ceremony”?

  7. Sam Brunson on December 24, 2013 at 12:27 am

    Zachary, you’re right, of course. Thanks. I’ve corrected the text.

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