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.

Oh S#$%, I Screwed Up My Tax Return!

No…not me, my return is perfect! But if you’re one those people who got in over your head, trying to do a return on TurboTax when you had no idea what you were doing, or you had an incompetent tax preparer omit things from your return, it’s not the end of the world, and you won’t go to jail for it either! So take a deep breath, and read on.

It’s a fact of life that people make mistakes, even when it comes to tax returns. After filing your returns, you may discover that you forgot to claim all those charitable contributions you made, or you realized that you forgot to include the W-2 income (and withholdings) from that job you left at the beginning of last year, or the broker sent you a corrected 1099 package. These are just a few examples, but the point is, there are many things that you may remember (or come to your attention) after you already filed your tax returns. The vehicle for making the corrections is filing Form 1040X (Amended U.S. Individual Income Tax Return) with IRS. Don’t forget to amend your state tax return too. Not all states have a separate form for amending the original return, so check with the tax department of the state you live in, to find out how to do it (or have your favorite tax professional help you out!). Note that an amended return doesn’t have to be filed for reasons such as mathematical errors (IRS will probably catch those, and send a notice), or if you forgot to attach a form that you should’ve attached (they’ll let you know about this, too).

Form 1040X can be used to amend whatever original federal return you filed, meaning that if you filed Form 1040, 1040A, 1040EZ, or even 1040NR, you can use the 1040X to make corrections. The 1040X isn’t ‘year specific’ like the 1040 is, meaning there isn’t a 2011 Form 1040X, rather, there are boxes at the top of the form for you to check which year you’re amending. If you have multiple years to amend, you must submit a separate 1040X for each year, and check the year that you’re amending. IRS recommends (and I personally concur) that if you’re amending more than one year, put each year in a separate envelope. That way, if one year gets lost in the mail, they won’t all get lost.

The structure of Form 1040X is fairly simple. There are three columns; the first one is for entering amounts from various lines on your original return, the second one shows the changes you’re making, and the third shows the corrected amounts. In addition to the form itself, you must attach any schedules that have changed from your original submission. Using one of the examples above, if you omitted charitable contributions on your original return, you must attach Schedule A (Itemized Deductions) to your amended return, to show the change. In addition to any attachments, there’s a section on page 2 of the return where you need to put an explanation of why you’re amending the return. And continuing the above example, you would write something like “original return omitted charitable contributions of $100,000” (yes, you were very charitable!)

Depending on whether you’re amending the return to include income or deductions that were missed on your original return will determine whether you owe additional tax or you will receive a refund. It’s all determined as part of the computations on page 1. If you have a balance due, pay it with the amended return, and IRS will send you a bill for any interest or penalties you owe. If you’re due a refund, it’ll be mailed at some point, after the return is processed. IRS indicates an 8 to 12 week processing time for amended returns. The other thing to remember is that if you’re amending a return to claim a refund, you must file it within three years of the date you filed the original return, or within two years of the date you paid the tax, whichever is later.

The moral of the story is, if you screwed up your return, don’t fret; it can be fixed. And next time, think about having a competent, trained professional (like Jay the CPA) prepare your taxes.

Please share this article with others who may benefit from the wisdom contained herein(!) And if you’ve had any interesting personal experiences with amending tax returns, please leave a comment.