Tax Implications of Friday’s Ruling on Same-Sex Marriage

Image courtesy of user Nemo on Pixabay.com
Image courtesy of user Nemo on Pixabay.com

The U.S. Supreme Court on Friday ruled that same-gender marriage was legal in all 50 states.

From a tax standpoint, this should — theoretically — make tax filings much easier for anyone in a same-gender marriage. Marriage is now marriage, and all married couples will file all tax returns as married.

But as tax blogger Kay Bell at the bankrate.com blog points out:

Although today’s ruling is momentous, there will be some wedding delays in states where same-sex marriage was banned.

Technically, the Supreme Court’s decision only applies to the four states where the cases before the court originated, Adam Romero, senior counsel at UCLA’s Williams Institute, told NPR. That’s Ohio, Kentucky, Tennessee and Michigan.

Further court action is necessary for the Supreme Court ruling to apply to the other states with bans, but most same-sex marriage advocates expect the judicial system to move relatively quickly.

This ruling should not have an impact on federal tax returns because couples in same-gender marriages have been able to file as married on their federal tax returns since 2013. This ruling affects state tax returns in states that had bans against same-gender marriage.

Couples affected by this should review prior-year state filings, as they may be able to file amended tax returns.

I would recommend waiting a bit to file those amendments, though, to see 1) what kind of guidance is released by state revenue agencies in the affected states, and 2) what happens in the 9 states where further court action might be necessary.

 

 

Marriage in the Tax Code, Part 11: Meet the “Single Penalty”

wedding-rings-150300_1280The 1948 tax reform fixed one inequality but created a new inequality – this time between single taxpayers and married taxpayers.

Example:

In 1949, John and Jane are married and have combined taxable income of $3,000 (approximately $29,000 today). Their total tax owed is $600.

Jack is a single taxpayer with taxable income of $3,000. His total tax owed is $620. Jack pays $20 more in taxes (approximately $192 today) even though he has the same amount of income as John and Jane.

As income levels increased, the disparity became more pronounced.

Example:

In 1949, John and Jane are married and have combined taxable income of $10,500 (approximately $101,000 today). Their tax liability is $2,330.

Jack is a single taxpayer with taxable income of $9,500. His tax liability is $2,470. Jack owes $140 more in taxes than John and Jane (approximately $1,350 today) even though his income is $1,000 less than theirs.

Single taxpayers complained about this inequality. In 1951, Congress created another filing status, called “head of household.” The filing status was (and still is) intended for single taxpayers who are raising children.

A new tax bracket was created for head of household filing status, with rates that were halfway between what a single person would pay and what a married couple would pay on a joint return.

More changes came in 1969 when Congress revised the tax brackets to further equalize the tax treatment of married people and single people. The changes took effect in 1971.

And again, in fixing one set of inequalities, the problem was over-corrected and a new set of inequalities was created – the “marriage penalty.”

Marriage in the Tax Code, Part 10: Filing Statuses Arrive in 1948

wedding-rings-150300_1280I ended Part 9 by mentioning that filing statuses were created for the first time in 1948. The original statuses were:

  • Single
  • Married Filing Jointly
  • Married Filing Separately

There was still just one tax bracket, but the way in which married couples calculated their tax eliminated the disparity between common law and community property law.

The reform of 1948 gave couples two choices: they could file as married filing jointly, or as married filing separately. The tax calculation on a joint return applied community property concepts — for ALL married couples in all states.

A couple would figure their joint taxable income, divide by 2, find the tax on that amount, and then multiply by 2.

Example 1:

In 1949, John has income of $8,000 and Jane has income of $4,000. They live in a common-law state and file a joint return showing taxable income of $12,000. They calculate the tax on $6,000 of income (1/2 of $12,000), which is $1,360. They multiply $1,360 by two to arrive at their total tax, of $2,720.

If they file separate returns: The tax on $8,000 is $1,960 and the tax on $4,000 is $840, resulting in total tax owed of $2,800.

Example 2:

John and: Jane have the same amount of income but live in a community property state. The can file a joint return in the same manner as Example 6, and owe $2,720.

Or they could file separate returns with each showing income of $6,000. Either way, they arrive at $2,720. There is now equality between common law and community property couples (unless our couple in Example 6 would for some reason choose to file separate returns).

The effect was that filing a joint return became the most convenient, and cost-effective, way for married couples everywhere to file tax returns. And the inequality between community property law and common law was eliminated from the tax code.

But not surprisingly, the fixes made in 1948 opened up inequalities elsewhere, which Congress would try to patch in the years to come.

History of Marriage in the Tax Code, Part 9: After Poe v. Seaborn

wedding-rings-150300_1280This is another installment in my ongoing series about the history of marriage in the tax code.

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Proposals to equalize the tax treatment of married couples were floated in 1933, 1934, 1937 and 1941, but none of the proposals were adopted.

The closest Congress came to making changes to the tax system came in 1941, when the House Ways and Means Committee proposed a mandatory joint return, with married couples being taxed on their combined income without the option to file separate returns or and without the option of applying community property laws.

This would have resulted in a tax increase on all two-income married couples. As Boris Bittker explains:

(T)wo unmarried taxpayers with separate  sources  of  income  would  have  to  pay  a  heavier  tax  if  they  got married  than if  they  lived  together  without  benefit  of clergy,  and  many married  couples would  be  able  to  reduce  their  tax  burden  by  getting divorced.  Quite naturally, therefore, opponents of the proposal assailed it as “a tax on morality.”

The proposal was never enacted, so the inequality between common law and community property states continued through World War II.

Some common-law states began taking matters into their own hands.

Oklahoma led the way, enacting community property provisions in 1939. Hawaii, Michigan, Nebraska, Oregon and Pennsylvania would follow Oklahoma’s lead. Proposals to enact community property law were also debated in Massachusetts and New York, but were never passed.

Finally in 1948, Congress acted. For the first time, filing statuses were created and we moved closer to the tax system we know today.

Marriage in the Tax Code, Part 8: 1920s Court Battles

wedding-rings-150300_1280This post is part of a larger research project I’m conducting regarding the history of marriage in the U.S. tax code. As I finish sections, I will post them here. This is a long-term project, so I can’t guarantee when the next segment will appear.

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In 1927 the U.S. Attorney General issued a new ruling relating to tax treatment of married couples in community property states.

In that opinion, the Attorney General said all community property states have different laws, so he was withdrawing his earlier opinion that said community property law applied in all community property states except California.

Instead, the Attorney General said the issue would be decided in a series of test cases – one from each state (including California again) – that would go before the U.S. Supreme Court.

Professor Pat Cain picks up the story from there:

In August of 1928, spouses from four community property states, Arizona, Louisiana, Texas, and Washington, filed test cases in federal district court.  In every case, the spouses had reported community income by allocating half to the husband and half to the wife.  In every case, the Internal Revenue Service refused the returns and instead assessed a tax against the husband, allocating 100% of the community income to him. The husbands in each case paid the tax and sued the local Collector of Internal Revenue in federal district court, claiming a refund in the amount of the additionally assessed tax. Ultimately these cases were consolidated and heard by the Supreme Court. In the lead case, taxpayer/husband Seaborn sued Burns Poe, the Collector of Internal Revenue for the District of Washington.

Source: Professor Cain’s research paper “Taxing Families Fairly,” available here.

Poe v. Seaborn, which was decided in 1930, would become a landmark case in taxation of community property. Indeed it is still referenced today in issues relating to taxation in community property states – including a key IRS ruling in 2010 that affected same-sex married couples and registered domestic partners in community property states.

The Supreme Court sided with the taxpayers in Poe v. Seaborn, and also sided with taxpayers in the other companion cases, including California. The result was, income splitting between spouses in all community property states was allowed.

While there were protests from the government and from married couples in common law states, the wheels of governmental change move slowly. It would take another 18 years after Poe v. Seaborn before filing statuses were created and equality would be achieved between married couples in common law and community property states.