Updated Wisconsin Tax Guidance for Same-Sex Married Couples

flag-36423_1280Earlier this month, the U.S. Supreme Court declined to hear appeals to cases overturning same-sex marriage bans in several states, including Wisconsin.

As a result, same-sex marriage is now legal in those states.

From a tax perspective, Wisconsin released guidance earlier this week saying that couples in same-sex marriage can now file joint Wisconsin tax returns. Previously, Wisconsin had said same-sex couples needed to file separate Wisconsin tax returns as single people, and recalculations may need to be done in arriving at Wisconsin taxes. That all goes away now:

Previously, same-sex couples who filed a joint federal tax return were required to file as single or head of household for Wisconsin. Schedule S was used to separate the income reported on the federal joint tax return to the separate Wisconsin returns. Schedule S should no longer be filed with a Wisconsin tax return.

Determining filing status

A couple is considered married for the whole year if they were lawfully married as of December 31. If a spouse dies during the year, the couple may file a joint return for the year unless the surviving spouse remarries during the year. Lawfully married means a valid marriage in a state that recognizes same-sex marriage.

Filing returns

2014 individual income tax returns
A lawfully married same-sex couple must file their Wisconsin individual income tax returns as married filing jointly, married filing separately or, if qualified, as head of household.

2013 and prior returns filed on or after October 16, 2014
A lawfully married same-sex couple must file their Wisconsin individual income tax returns as married filing jointly, married filing separately or, if qualified, as head of household.

2013 and prior returns filed before October 16, 2014
A lawfully married same-sex couple who already filed their tax returns, may choose (but are not required) to amend their Wisconsin tax returns using Form 1X, claiming a filing status of married filing jointly, married filing separately or, if qualified, as head of household. Prior returns may be amended as long as the period of limitations has not expired.

From a news release on the Wisconsin Department of Revenue website.

Image courtesy of user Nemo on Pixabay.com

Taxpayer Advocate Says IRS Issues Too Many FAQs

ID-10094159This was recently in my e-mail inbox from PPC:

National Taxpayer Advocate, Nina Olson, spoke at a recent accounting conference, addressing the IRS’s practice of increasingly providing significant guidance in the form of Frequently Asked Questions (FAQs) and other formats that aren’t published guidance. There are a number of ways that this can be problematic, including the fact that such guidance can be changed without notice. It is also unclear who writes FAQs (i.e., no contact name is listed, which is typically provided in published guidance), what type of vetting process they are subject to prior to online publication, and the extent (if any) to which taxpayers can rely on them, which is especially problematic when the FAQs are the primary guidance available on a topic.

From PPC’s “Five-Minute Tax Update” on 7/30/14

I agree. Too many FAQs and not enough facts.

Take the example of something I wrote about a few weeks ago regarding same-gender marriages and the impact of last year’s DOMA ruling where DOMA got struck down.

My take on the official IRS response to the DOMA ruling (Notice 2013-17) is that any tax return filed with the IRS after September 16, 2013, by a person in a same-gender must use a filing status of “married.”

But then the IRS — in a news release (!) — later said that using a status of “married” was optional on prior-year amended tax returns. This was in a paragraph tacked onto the end of a news release about something completely unrelated to same-gender marriage.

I won’t belabor the point here because I already wrote about it in this blog post from June.

But the overall point is, things like FAQs and news releases are  no substitute for coherent, authoritative guidance.

Can one cite a FAQ or news release as defense in an audit? Doubtful.

I’ll be interested in seeing if the IRS responds to Ms. Olson’s statements. That seems doubtful too.

Image courtesy of Stuart Miles / freedigitalphotos.net

Life After DOMA: A History of Marriage in the Tax Code

One of my special research projects has been to research the history of marriage in the U.S. Tax Code.

I started this project nearly 3 years ago. Around this time, my practice became heavily involved in helping couples in same-gender marriages navigate the tax complexities they faced when the Defense of Marriage Act existed.

A common theme in the media and among clients was (and still is) that marriage will “always” result in bigger refunds at tax time. This simply is not true.

I knew about the so-called “marriage penalty” and how, historically, approximately 50% of married couples will see their tax liability increase as a result of getting married.

But I didn’t know why there was a marriage penalty. I don’t like not knowing why.

So I set out to find out.

Three years later, I’m still researching but have created a draft manuscript and have more than 4,000 words written on a lengthy essay about the history of marriage in the tax code.

Over the months to come — okay, probably the years to come — I’ll be sharing parts of this manuscript. It’s an ongoing project and I don’t know yet how often I’ll be posting parts of it here. I also don’t know when it will be finished or what the finished product will look like.

But I think it’s fascinating stuff, so I have to share it. Stay tuned.

Same-Sex Marriage and Amending Prior-Year Returns

On Monday I wrote about a real scenario I have encountered, regarding adoption credit carryforwards. I asked three questions in that post and only answered two of them. The third question was: if Angie (the fictional character I used in my example) amends her 2012 return, would she have to file that amended return as a married person and pay back the adoption credit she had claimed?

A broader way of asking the question is: if someone who’s in a same-sex marriage amends a prior-year return that they had previously filed as a single person due to the Defense of Marriage Act, must that amended return show a filing status of married?

The answer is: I’m not sure.

The IRS, in Revenue Ruling 2013-17, says the following regarding any return filed after September 16, 2013:

If an affected taxpayer files an original return, amended return, adjusted return, or claim for credit or refund in reliance on this revenue ruling, all items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.

At the end of April, I received an alert from PPC (who I use for most of my tax research):

For (original) returns filed before 9/16/13, legally married same-sex couples can file amended returns to change their filing status to married filing separate or married filing jointly. However, they are not required to change their filing status on a prior return, even if they amend that return for another reason. Either way, their amended return must be consistent with the filing status they have chosen. News Release IR-2014-56.

The source was a news release from the IRS. News Release IR-2014-56 is actually a news release that talked about how many tax returns had been filed through April 18th. The part about same-sex couples was tacked on to the news release, and says:

For returns originally filed before Sept. 16, 2013, legally married same sex couples have the option of filing amended returns to change their filing status to married filing separately or married filing jointly. But they are not required to change their filing status on a prior return, even if they amend that return for another reason. In either case, their amended return must be consistent with the filing status they have chosen.

I’ll admit to still being confused, but here’s what I think it means:

  • Using Angie from my previous post, if she amends her 2012 tax return for some reason other than changing the adoption credit, she could still use a “single” filing status and keep the adoption credit.
  • For same-sex couples in general, if they find something on a prior-year “single person” tax return that needs changed, they can amend and leave their filing status as single if they want.

What’s less clear is, what if the item being changed relates directly to being married? Examples:

  • If Angie amends to make a change to the adoption credit, would she need to file as married? I almost think she would, because it was a second-parent adoption. Therefore any future changes to the calculation of the credit would need to take marriage into account.
  • If a taxpayer amends because of something related to being married, such as having been taxed on their spouse’s health insurance premiums, would that amended return need to be filed as married? I think it would be.

Prior-Year Adoption Credits and Same-Sex Marriage

Scenario: Angie and Alice are in a same-sex marriage. In 2012, Alice went through the adoption process to become the parent of Angie’s child. Because of the Defense of Marriage Act, Alice properly filed her 2012 tax return as a single person … and claimed the adoption credit for adopting Angie’s child.

Questions:

  1. After the repeal of DOMA, Angie and Alice’s marriage is recognized by the federal government back to the beginning of their marriage. So Alice’s adoption was a “second-parent” adoption. Second-parent adoptions are not eligible for the adoption credit. Will the IRS come after Angie and Alice on this?
  2. Alice’s 2012 tax return was such that she had an adoption credit carryforward. Can this carryforward be used on her 2013 joint return with Angie, considering that the adoption is now a second-parent adoption?
  3. What if Alice finds something that she needs to amend on her 2012 tax return? Will she need to change her 2012 filing status to “married” and pay back the adoption credit on that amended return, even if she’s amending for some other reason?

ONE: We know that the IRS will honor the filing status used on tax returns filed prior to September 61, 2013. See Revenue Ruling 2013-17. Angie properly filed her 2012 tax return as a single person, so there is no danger of the IRS challenging the adoption credit claim.

Additionally, let’s look at the wording of the Internal Revenue Code regarding the adoption credit. According to IRC Section 36C(d)(1)(C), qualified adoption expenses are expenses:

(W)hich are not expenses in connection with the adoption by an individual of a child who is the child of such individual’s spouse

The Defense of Marriage Act specifically said that the term “spouse” could only refer to couples in opposite-sex relationships. Angie properly filed her 2012 tax return based on the law of the land at the time. Angie and Alice were considered legal strangers at the time, so the adoption was not a second-parent adoption.

Which answers question two: I believe the carryforward can be used on Angie and Alice’s joint 2013 tax return.

Number three is worthy of a blog post of its own, which I’ll have on Wednesday.