Sidestepping Unseen Tax Pitfalls For Same-Sex Couples
Not many people look forward to their annual tax deadlines. A process that is already riddled with confusing forms and statements has become increasingly convoluted for gay couples. As states are beginning to legally permit and recognize gay marriage, LGBT couples are forced to learn how to file their taxes in a manner that will appease agents on both state and federal levels.
Heterosexual couples that are legally married at the state and federal level do not face many discrepancies when filing their taxes at each stage; they can file jointly at both. Gay couples, however, are viewed as legally married in some states, but are never legally recognized as married by federal agencies such as the Internal Revenue Service (IRS). This often results in gay couples having to file entirely different sets of paperwork at the state and federal level: one state form as a legally recognized couple, if they are fortunate enough to live in states that have legalized marriage, and other governmental forms sent separately as individuals to the IRS.
Some gay clients still prefer to simply file separately at all levels, rather than endure a document-induced headache from learning and complying with all of the different state and federal tax procedures. But for many LGBT clients, deciding whether or not to file their taxes together is less than half of the battle. Not only are they tasked with making the complicated call of handling their taxes jointly, but they also face the challenge of finding a capable and willing accountant.
Mark Berry, an accountant particularly well versed in tax law as it pertains to the LGBT community, discusses the negative consequences to gay couples that spawn from the government's current tax policies. He asserts that, "Under present law, LGBT couples are at an economic disadvantage in that they pay a higher overall tax rate than couples that are able to file jointly. LGBT couples are required to file as singles and would pay more in tax versus a two-earner couple that is able to file jointly."
He adds that there are also various estate tax disadvantages for gay couples.
"Those couples in ’traditional marriages’ also receive estate tax benefits depending on the size of the estate," said Berry. "Married couples receive the benefit of transferring the assets in the deceased spouses’ estate in most cases tax free, whereas LGBT couples do not receive that benefit."
Taxes can get increasingly complicated for gay couples with children. In addition to the paperwork required to file tax returns at the federal level, the IRS also requires that couples with adopted children jump through additional hoops each year. One client, who wishes to remain anonymous for fear of repercussions from the IRS while her case is still open, is experiencing first-hand the tax pitfalls to being a gay adoptive mother.
In December 2010, this client was granted full parental rights to her two adopted children. When she had to file her taxes, she sent in her usual 1040 form with statements and billing receipts from her attorney to prove legal parentage of her children. But the IRS rejected this paperwork, insisting that she provide a copy of her Judgment of Parentage, which is proof that the court has granted her status as her children’s legal parent. She never received this document from the court until July of 2011.
Attempting to rectify the situation, she has reached out to various agencies and organizations responsible for providing people in her situation with assistance.
"Call any of those agencies in Pennsylvania or New Jersey to get help or answers," she said, "and see if you can talk to a real person. Real people there are just non-existent. You get recordings and messages and it is impossible to navigate."
Through no fault of her own, this client was unable to provide the IRS with the necessary documents to prove her parentage. Rather than being pardoned for her misfortune, the IRS has fined her time and again for not having the paperwork that the courts have failed to provide her with. She estimates that since her federal tax debacle began in 2010, she has accumulated up to $40,000 in tax debt, about 20 percent of which is from interest and penalties that she has accrued. Running out of ways to pay off this debt, the client has had no choice but to use part of her 401(k) plan to keep her family’s debt at bay. She has yet to see any kind of resolution in her case with the IRS.
Gay couples across the United States are being forced to comply with a federal tax system that is actively working against their best interests. The organizations designed to assist them are inaccessible, and accountants and attorneys willing and able to serve as their advocates are few and far between. The federal government expects these couples to acquiesce to its convoluted and prejudicial tax law, but has failed to create an environment that is conducive to them following it.
"Even though states are increasingly recognizing same-sex marriage, until DOMA is repealed, LGBT couples will be treated unequally in the eyes of the federal government," asserted Berry. The federal government has not hesitated to bury same-sex couples in paperwork. A simple solution to ease the workload for both parties would be to replace that endless stack of paperwork with one document: a marriage license.