Couples get no love from IRS

by Lisa Keen

Bay Area Reporter

Tuesday March 24, 2009

Every year, taxpayers who send in their tax returns sign a statement at the bottom of their forms stating, "Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete."

And yet, the Internal Revenue Service expects gay people who are legally married to same-sex spouses to lie on their tax returns and check off "single" as their filing status.

"Under federal tax law, gay marriages are not recognized because of the Defense of Marriage Act," said Nancy Mathis, an IRS spokeswoman. "Therefore, same-sex marriages are not recognized, so [gay spouses] have to file as single taxpayers."

That's what the IRS expects, and yet its Web site and instruction booklets offer only one sentence of guidance to married same-sex couples who must prepare tax returns for the federal government. That sentence simply states the impact of DOMA: "For federal tax purposes, a marriage means only a legal union between a man and a woman as husband and wife."

Massachusetts and California, on their Web sites, have extensive, easy-to-find guides for same-sex married couples on how to file their state taxes. Instructions for Connecticut, which began issuing marriage licenses to same-sex couples in November 2008, are more muddled, in part because the state also has civil unions.

The number of same-sex couples having to tackle the insults and inequities of the federal tax return is growing. They numbered about 10,000 - all in Massachusetts - last year. This year, Massachusetts has topped 16,000 (according to Gay and Lesbian Advocates and Defenders) and California (between June and November) added more than 18,000. (Figures for Connecticut are not yet available, due to technical issues.)

What these couples will discover - if they didn't already know - is that DOMA not only renders them second-class citizens - by virtue of requiring that their legitimate marriages be deemed invisible - but it forces them to pay more taxes than similarly situated heterosexual couples.

Nima Eshghi, an attorney with GLAD, the New England organization that this month filed a federal lawsuit challenging DOMA, can rattle off five costly disparities without even glancing at notes:

1. Shuffling down the tax rate. In many relationships, one spouse earns more than the other. Sometimes, the higher income could - for an individual - mean a much higher tax rate. But a married heterosexual married couple - by filing jointly - can, in essence, shuffle off the higher tax rate on the larger income, said Eshghi, "because the married filing jointly category allows for income splitting so the higher income doesn't get bumped up to the higher tax rate." Because same-sex married couples can't file as married filing jointly, she noted, "they lose the benefit of being able to pay less taxes and, in fact, pay more than similarly situated opposite sex couples would pay."

2. Spousal IRA deduction. For married couples filing jointly, the tax code allows one spouse to contribute up to $5,000 to an individual retirement account for the other spouse. There are limits, but it provides straight couples with yet another valuable deduction that gay married couples can't have.

3. Tax-free gifting. Anytime you gift something - cash or otherwise - worth more than $12,000 to someone, you have to pay the IRS a tax on that. Unless you're married to that person and - because of DOMA - that person is of the opposite sex. In other words, one spouse can put the other spouse on the title of a house and there's no tax to be paid. But if a gay person tries to do the same for his or her same-sex spouse, then he or she must pay the "gift tax" on the value of half the house minus $12,000. (In tax year 2009, the exclusion goes up to $13,000.)

4. Tax-free health coverage. Employers often pay all or part of an employee's health insurance coverage, including family plans that cover a spouse and children. For tax purposes, the cost of this coverage is not considered to be part of the employee's income. But, if the federal government - as under DOMA - does not consider your spouse to be a spouse under federal law, then it looks at the health coverage for your same-sex spouse as if it is additional income provided by your employer. You pay taxes on that, where your straight colleague does not. One plaintiff couple in GLAD's lawsuit challenging DOMA estimates they pay about $1,200 per year more because of this disparity.

5. Tax-free estate transfer. When one spouse dies in a straight married couple, the surviving spouse often receives the full value of their estate and assets. And the surviving spouse pays no tax on that gain, which is often in the hundreds of thousands of dollars, or millions, if a house is involved. But if a spouse in a same-sex marriage dies and leaves all his or her estate and assets to his or her spouse, that surviving spouse has to pay taxes on the value above $1 million.

GLAD's lawsuit challenging DOMA notes that two of its eight plaintiff couples filed amended federal tax returns with the IRS, asking to be re-categorized as married taxpayers. One couple paid $6,371 more in federal income tax for tax year 2007 because of DOMA than they would have paid had they been permitted to file as married filing jointly. Another couple paid $5,546 more that same tax year because of DOMA.

But, GLAD notes, both requests were rejected by IRS, citing DOMA.

Mathis, the IRS spokeswoman, said she didn't have any information on the number of married same-sex couples who may have tried to file their returns as married filing jointly, nor did she have any information on how many might have been audited. But when joint tax returns are processed, she said, the IRS matches up the Social Security numbers and would identify same-sex couple returns as "errors."

GLAD's Eshghi noted that her agency still advises married same-sex couples to file individual federal returns and check off "single" under filing status.

"That's the law as it stands now," said Eshghi, "and we wouldn't want to get anybody into tax trouble."

What if...

Ever wonder what kind of trouble you could get into by filing as married filing jointly with the IRS? Well, in this case, the IRS Web site provides plentiful information.

The "2008 IRS Data Book" indicates, "The failure to comply with federal tax laws may result in civil penalties" and that "Individuals who deliberately fail to comply with federal tax laws may also be subject to a criminal investigation, which could result in prosecution, fines, and imprisonment."

The Web site also notes that the IRS' Legal Source Tax Crimes program pursues "cases that may threaten the tax system, such as frivolous filers or nonfilers who challenge the legitimacy of the tax laws. ..."

Now, here's another irony: Same-sex couples also must fill out federal tax forms as married. That's because state tax forms rely on information from the federal form and state tax laws in California, Massachusetts, and Connecticut require married same-sex couples to file as married on state returns. The Bay Area Reporter reported on this issue in last week's edition.

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