Glossary: Varnum Ruling

flag-36423_1280Whenever you see or hear reference to the Varnum Ruling in Iowa, it’s referring to the 2009 decision by the Iowa Supreme Court that legalized same-gender marriage in Iowa.

I used to do a lot of blog posts about the tax implications of same-gender marriage, and in those posts, you’ll see occasional references to the Varnum ruling.

Immediately after the ruling, the Iowa Department of Revenue issued a brief memo saying that couples in same-gender marriages in Iowa would need to file their Iowa tax returns as married and that “certain recalculations” may need to be made.

The tax lives of people in same-gender marriages was complicated. They had to file as single at the federal level but married in Iowa. And Iowa provided little guidance.

In the 4+ years between the Varnum ruling and the U.S. Supreme Court ruling striking down DOMA, that was all the guidance we got from IDR.

Most of those complications went away when DOMA was overturned, but there still can be complications with multiple-state filings if someone has to file a tax return in a state that doesn’t recognize same-gender marriage.

I don’t write about this topic as much anymore, but you can find my extensive archives here.

You can read more about the backstory of the Varnum case here.

Does Nebraska Recognize Same-Sex Marriages for Taxes?

map-43787_1280Question from a website visitor: I live in Nebraska and am in a same-sex marriage. My spouse and I got our marriage license in Iowa. Can we file our Nebraska taxes as a married couple.

Short answer: no.

Longer answer: Nebraska is one of the few remaining states that still has a constitutional amendment prohibiting same-gender marriage. As long as that stands, Nebraska doesn’t recognize same-sex marriage.

This means, couples in a same-sex marriage who have a Nebraska filing obligation CANNOT file that Nebraska tax return as a married couple.

Couples in this situation will need to:

  1. File their federal tax return as married
  2. Create two “mock” single person federal tax returns
  3. Use those mock returns to file two Nebraska tax returns as single people

What About Multiple States?

Plenty of people who live in western Iowa cross the Missouri River and work in Omaha. To a lesser extent, some people in the Omaha area work in Iowa.

If that person is in a same-sex marriage, the steps are the same as outlined above, except the Iowa tax return is filed as married, because Iowa recognizes same-sex marriage.

The Nebraska return is filed as “single” regardless of whether the person lives in Nebraska or they live in Iowa, and regardless of how they file their federal and Iowa tax returns.

For more information, see this page on the Nebraska Department of Revenue website.

Image courtesy of user Nemo on Pixabay.com

A Brief History of Marriage in the Tax Code, Part 2: Taxes in 1913

wedding-rings-150300_1280This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code.

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years, literally, to finish, so I can’t guarantee when the next post on this topic will appear.

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In Part 1, I talked briefly about how taxes worked back in 1913. In this part, I want to dive a little deeper.

The tax brackets were broad from 1913 through 1916. For example, a tax rate of 1% applied to taxable income of $0-$20,000. Adjusted for inflation, a taxpayer could have income of nearly $465,000 and still be in the 1% range of the tax bracket.

The rate increased to 2% on income between $20,001-$50,000. The top rate was 7% and applied to taxpayers with taxable income of more than $500,000 (the modern-day equivalent of $11.6 million).

Dual-income married couples had little reason to file separately, because the vast majority of them fell in the 1% range of the tax bracket.

Example 1:

John and Jane are a married couple. John has taxable income of $10,000; Jane has taxable income of $5,000. In 1913, their tax-filing options were: file a joint return showing $15,000 of taxable income, or file separate returns. Either way, they would arrive at the same amount of tax owed:

  •         $10,000 x .01 =$100 tax; $5,000 x .01 = $50 tax; Total tax $150

OR

  •         $15,000 x .01 = $150 total tax

In 1913, 97.6% of married couples filed joint returns (out of 278,835 tax returns filed by married couples in 1913, 272,153 were joint returns [or returns of one-income couples]; 6,682 were separate returns). Source: a study by a certain “Miss Coyle” in a Treasury Department staff memo. Ms. Coyle’s complete memo can be found at this link: http://taxhistory.tax.org/Civilization/Documents/marriage/hst28695/28695-1.htm

Exemption Amounts

Not only were the tax brackets broad, but many Americans were exempt from owing taxes because of generous exemption amounts. The exemption amounts were $3,000 for a single person or $4,000 for married couples (the equivalent of about $70,000 and $93,000 in modern-day dollars). A person with income below those amounts owed no tax and did not need to file a tax return.

Big Changes on the Horizon

America entered World War I in 1917. Wars take money. Congress changed the tax code with the Revenue Act of 1917.

Exemption amounts were slashed. The simple tax bracket of 1913 was replaced with a more progressive bracket with 21 marginal rates (yes, 21!) ranging from 2% to 67%.

Millions of people were drawn into the tax code, and taxes became more of a burden.

This ties into our discussion of marriage in the tax code.

We’ll dive deeper into the 1917 changes in Part 3.

A Brief History of Marriage in the Tax Code: Part 1, In the Beginning

This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code. wedding-rings-150300_1280

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years to finish, so I can’t guarantee when the next post on this topic will appear.

—–

Part 1: In the Beginning

The modern-day income tax return has five options for filing status:

  • Single
  • Head of Household
  • Married Filing Jointly
  • Married Filing Separately
  • Qualifying Widow(er)

Each filing status comes with its own tax bracket. Specific pieces of tax law and regulations vary depending on filing status as well.

But in the beginning, in 1913, there were no filing statuses. There was just one tax bracket that applied to all taxpayers.

As Yale Law School Professor Boris Bittker notes, the focus of the original tax code was on the individual:

(T)he tax legislation enacted by Congress  was dominated by an individualistic approach at the outset. This focus on individuals rather than married couples, families, or  households was  implicit as early as 1913, when the introductory words of the first taxing statute based on the sixteenth amendment  imposed a  tax “upon the entire net income  arising or accruing from all sources … to every  citizen  of the United  States … and to every person residing in the  United States, though not a  citizen thereof.” The Revenue Act of 1916 made the point explicit by taxing “the entire net income received … by every individual.”

Bittker, Boris I., “Federal Income Taxation and the Family” (1975). Faculty Scholarship Series. Paper 2291. http://digitalcommons.law.yale.edu/fss_papers/2291

Despite the individualistic focus of the original tax code, married couples had the option of filing a joint return in 1913. But unlike today, a joint return in 1913 was merely a reporting mechanism in which husband and wife could combine their income onto one tax return, rather than each filing their own separate returns. It was not a “filing status” in the modern sense and there was no special tax bracket associated with it.

In Part 2 I’ll go into more detail about how taxes worked in the beginning.

A Brief History of Marriage in the Tax Code: Introduction

This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code. wedding-rings-150300_1280

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years to finish, so I can’t guarantee when the next post on this topic will appear.

Below is the very first segment.

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I started on this document in 2011 when my practice was heavily involved in the tax complications of same-gender marriage.

Back then — up until the Defense of Marriage Act was overturned in June 2013 — couples in same-gender marriages lived a complicated tax life.

They were required to file their federal tax returns as two unmarried people, but they were required to file their state tax returns as a married couple (assuming they lived in a state that recognized their marriage). To create the state return, the couple needed to re-calculate their federal taxes to apply federal tax law for married people.

In working through these recalculations, I discovered that some couples would benefit from filing their federal tax return as married, some would see a minimal difference, and some would be worse off.

But my question was: why? Why does tax law treat married people differently from unmarried people?

Enter my research into the history of marriage in the tax code.

This document is not focused on same-gender marriage, because these are things couples in “traditional” marriages have known all along: getting married does not always mean big savings at tax time.

But again, the question is: why?

To answer, we need to return to the beginning, to 1913 and the start of the income tax in the United States. Stay tuned for the next segment.