The Supreme Court, the Defense Of Marriage Act, and Tax Planning

If you’ve either been living under a rock or on another planet in 2013, I want to let you know about a momentous event that happened about a half year ago. The U.S. Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA), which required same-sex spouses to be treated as unmarried for purposes of federal law, was unconstitutional. Obviously there are many federal laws, and a lot that have been affected by this ruling, but I’ll try to lay out a few things to keep in mind, as they relate to tax laws and tax planning.

For Federal tax purposes, IRS will generally recognize as married, same-sex couples who were married in a state, the District of Columbia, a U.S. territory, or a foreign country that authorizes same-sex marriages. Note that the determining factor is where the couple marries, not where the couple is domiciled (generally, where they live). As an example, a same-sex couple lives in VA but gets married in DC. For federal tax purposes they will be considered married. On the flip side of this, IRS will not recognize as married, same-sex couples who have entered into a registered domestic partnership, civil union, or other similar formal relationship under state law “that is not denominated as a marriage under the laws of that state.”

O.K., you’re a same-sex couple, you’ve gotten married in a state that recognizes same-sex marriages, so for federal tax purposes, now what? Under this ruling, legally married same-sex couples will be treated as married for all Federal tax purposes, including income, gift, and estate taxes. Some of provisions that need to be considered are filing status, claiming personal and dependency exemptions, the standard deduction, contributing to an IRA, earned income tax credit, child tax credit, and many others.

I’m guessing that you’re now wondering when all of this goes into effect (did I guess correctly?). The answer is, it already did. IRS’s revenue ruling (2013-17) is generally effective on or after September 16, 2013. One thing that can be done immediately is to look back to any tax year for which the statute of limitations has not yet expired (generally three years) and determine whether amending tax returns will result in tax refunds. If it will, amended returns can be filed. Note that for 2012 or prior year “original” returns filed before 9/16/13, same-sex couples may choose (but are not required) to amend returns.

If a same-sex couple files an “original” 2012 or prior year return on or after 9/16/13, they must file the return as married filing jointly or as married filing separately. As with opposite sex couples, the date of the marriage will be the determining factor for what year married returns will start, and for which years single (or possibly head of household) would apply.

For the upcoming 2013 tax return filing season, legally married same-sex couples must file as married filing jointly or married filing separately. Single filing status does not apply, period.

Having said all of that, you now ask “what about the states”, right? The answer is, we’re not sure yet. Virginia recently issued a statement unequivocally saying that same-sex marriages are not recognized in the state. VA legally married same-sex couples (for Federal purposes) will have to file married returns for Federal purposes (joint or separate) and for VA purposes will have to file as single (or head of household, if applicable). This scenario will be the same for any state that doesn’t recognize same-sex marriages. Check your state’s laws to determine applicability.

I could go on for another 600 words, but I’ve barely scratched the surface of discussing planning points and opportunities. You should consult with your favorite tax professional (whose name hopefully starts with Jay and ends with Reiner) about details that you need to know as you move into the upcoming filing season and tax years beyond. Please send a link to this article to any friends, family, or associates who could benefit by it.

Holidays and Tax Planning

Thanksgiving is history. Black Friday’s gone. Cyber Monday’s in the books. What’s there to look forward to? The second half of Hanukkah? Christmas? Are you kidding, we’re talking tax planning, people!

That’s right, rather than thinking about ways to spend money, think about ways to save money, especially on taxes. Since there’s about a month left in 2013, you still have a little time to save a few dollars in tax before the ball drops in Times Square.

Net Investment Income Tax – starting with the 2013 tax year, taxpayers with adjusted gross income (AGI) over $200K single/$250K married filing jointly are subject to an additional tax of 3.8% on net investment income above the threshold amounts. This tax applies to income that includes capital gains, interest, dividends, rents, and others. While some of these items may be beyond your control (such as how much dividend is paid on a stock or mutual fund), you may be able to control your AGI, to keep it below the threshold where the 3.8% tax kicks in. One way is if you’re taking retirement plan (IRA etc) distributions. If you’re considering taking more than a minimum distribution, consider whether a higher distribution would put you above the level where the 3.8% tax kicks in.

Personal Exemption Phase-out – this “gem” has been (thankfully) missing from tax returns for the last three years, but has come roaring back for 2013. For AGI over $250K single/$300K joint, the deduction for personal exemptions reduces (phases out), and goes down to zero with AGI of about $372K single/$422K joint. Taxpayers closing in on the phase-out range of AGI should consider if there are ways to push off 2013 income to 2014, to keep personal exemptions intact.

Itemized Deduction Phase-out – similar to the personal exemption phase-out, the reduction of itemized deductions returns in 2013. Common itemized deductions are mortgage interest, real estate tax, charitable contributions, and others. As with the exemption phase-out, when AGI goes above the thresholds, the total allowed itemized deductions begin to reduce. Note that reduced deductions and exemptions have the effect of subjecting more income to tax, which has the effect of increasing your overall net tax rate.

As you may have concluded, the tax and phase-outs I mentioned above are driven by your level of AGI, so it’s important to look at ways to reduce your adjusted gross income. The best way to address this is to look at page 1 of your 2012 tax return, since the page 1 ends at AGI. Consider if there are ways of delaying income, taking losses on investments (which would reduce income/AGI up to $3K), switch investments to tax free municipal bonds/funds, and increasing retirement plan contributions, among other things.

While increasing itemized deductions won’t reduce your AGI, they will still probably net you some tax savings. Making additional charitable contributions could help, as would bunching medical or miscellaneous itemized deductions, both of which are subject to AGI related “floors”.

So while you’re in the middle of a tug of war with that jerk at Walmart over the last Xbox 360 on the shelf, just think about how much more fun it would be to save some money on your taxes!

How are you planning on saving on your taxes this year? Or next? Leave a comment and let me know what you’re thinking. And please forward this article to a friend or family member who might (tax) benefit from it.