On August 29, 2013, the U.S. Department of the Treasury and the Internal Revenue Service ("IRS") released Revenue Ruling 2013-17 (the "Ruling") and related Q&A guidance for legally married same-sex couples and couples in domestic partnerships or civil unions to reflect and address changes in the law following the recent United States Supreme Court decision in United States v. Windsor, 570 U.S. ---, 133 S. Ct. 2675 (2013). A discussion on the Windsor decision and its potential implications is available here.
Interpreting Terms Relating to Marriage
The Ruling provides important guidance on how terms relating to marriage in the Internal Revenue Code of 1986, as amended (the "Code"), will be interpreted and applied to legally married same-sex couples. The Ruling states that for Federal tax purposes, the IRS will interpret gender-neutral terms (e.g., spouse and marriage) and gender-specific terms (e.g., husband and wife) in the Code to include same-sex spouses "if the couple is lawfully married under state law." However, for Federal tax purposes, the term "marriage" does not include "registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under that state's law." Likewise, the terms "spouse," "husband and wife," "husband," and "wife" do not include individuals who have entered into such relationships not considered a "marriage" for these purposes.
Determining Marital Status
The Ruling explains how to determine whether a same-sex couple is legally married for Federal tax purposes. For Federal tax purposes, the IRS will consider individuals of the same sex "to be lawfully married under the Code as long as they were married in a state whose laws authorize the marriage of two individuals of the same sex, even if they are domiciled in a state that does not recognize the validity of same-sex marriages." According to the IRS's Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law (hereinafter "Answers for Same-Sex Couples"), the IRS will also look to state or foreign law to determine when the couple was lawfully married. Under the Ruling, same-sex spouses are "married" for all Federal tax purposes, including rules relating to head of household filing, dependency deductions, standard deductions, adoption credits, community income, and passive activity losses for rental real estate activities. Thus, for example, a same-sex couple that is legally married in Iowa but domiciled in Nebraska will be treated as "married" for Federal tax purposes even though the Constitution of the State of Nebraska does not currently recognize their marriage. It is unclear how Nebraska will treat same-sex couples who are married for Federal tax purposes because the current Nebraska income tax system generally "piggy-backs" onto the Federal system.
In contrast, the IRS's Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions explains that registered domestic partners are not "married" for Federal tax purposes, and the rules relating to unmarried persons apply equally to these individuals.
Filing Status for Legally Married Same-Sex Couples
The Ruling provides guidance regarding how legally married same-sex spouses should file their Federal income tax returns. For tax year 2013 and going forward, legally married same-sex spouses must generally file their Federal income tax return using a "married filing separately" or "jointly filing" status. This general rule also applies for original tax returns filed for tax year 2012 and all prior years. Same-sex spouses who filed their tax return before September 16, 2013 (the effective date of the Ruling), may choose, but are not required, to amend their Federal tax returns to file using married filing separately or jointly filing status, provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.
Applicability of Ruling
The determinations in the Ruling will be applied prospectively as of September 16, 2013. Affected taxpayers may rely on the Ruling "for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from these holdings, provided the applicable limitations period for filing such claim under section 6511 has not expired."
Applicability of Ruling for Employers and Employee Benefit Plans
The Ruling and the IRS's Answers for Same-Sex Couples provides limited guidance regarding the taxation of certain employee benefits to same-sex couples. Affected taxpayers may rely on the Ruling retroactively, subject to the applicable limitations periods, with respect to "any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing 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 benefits or fringe benefits that were provided by the employer and are excludable from income under sections 106, 117(d), 119, 129, or 132 based on an individual's marital status."
For these purposes, if an employer provided health coverage for an employee's same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee's spouse been recognized as the employee's legal spouse for tax purposes. Likewise, if an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee's same-sex spouse under the employer's health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee's spouse.
Under both of these scenarios, the employer "may claim a refund of, or make an adjustment for, any excess [Social Security] taxes and Medicare taxes paid," provided that the limitations period for filing a claim for refund has not run. The employer may do so, even if the employee cannot be located after reasonable attempts or declines to participate (in writing) after being notified and given the opportunity to participate. However, the employer may only claim a refund of the employer's portion, not the employee's portion. The IRS has indicated that a "special administrative procedure" will be provided in forthcoming guidance "for employers to file claims for refunds or make adjustments for excess [Social Security] taxes and Medicare taxes paid on same-sex spouse benefits."
An employer may also make adjustments for "over withheld income tax" 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." Employers cannot, however, make claims for refunds of over withheld income tax for prior years.
A sole proprietor who employs his or her same-sex spouse is also affected by the Ruling. A sole proprietor who employs his or her same-sex spouse for services performed for the sole proprietor's business may claim a refund, subject to the applicable limitations period, of "the [Social Security], Medicare, and FUTA taxes paid on the compensation that the sole proprietor paid his or her same-sex spouse as an employee in the business."
The Answers for Same-Sex Couples also provides specific rules for qualified retirement plans. Question and Answer 16 states that, for purposes of satisfying the Federal tax laws relating to qualified retirement plans, a qualified retirement plan "must treat a same-sex spouse as a spouse," "must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages," and must recognize that "[a] person who is in a registered domestic partnership or civil union is not considered to be a spouse..., regardless of whether that person's partner is of the opposite or same sex." Qualified retirement plans must comply with these rules as of September 16, 2013.
The IRS intends to issues further guidance on the retroactive application of the Windsor decision to other employee benefits and employee benefit plans and arrangements. The IRS "anticipates 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."
Action Items and Next Steps
In addition to the action items set forth in our previous client alert, as discussed above, employers may want to consider claiming a refund for the Social Security taxes and Medicare taxes paid on certain benefits provided to an employee's same-sex spouse.
The Answers for Same-Sex Couples establishes that qualified retirement plans must comply with certain rules set forth in the Ruling. Compliance is required as of September 16, 2013. Sponsors of qualified retirement plans should immediately review their plan documents, employee communications, and plan administrative practices to determine whether changes and amendments need to be made to comply with the Ruling. Fraser Stryker's employee benefits attorneys are ready to assist employers, plan sponsors, and plan administrators in reviewing and amending qualified retirement plans to comply with the Ruling.
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This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.
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