Why the Supreme Court Ruling Makes My Life Easier: A Tax Preparer’s Reaction to Obergefell v. Hodges
I was sitting out on the deck with my husband and he asked me what I wanted for my birthday. I ran down my usual answers, “world peace, ending world hunger, etc.” He gave his usual answer, “Probably not this year.” I told him, “That’s alright, the Supreme Court just passed marriage equality, that makes my life easier. I’m happy with that.” He gave me that raised eyebrow look and said, “Care to explain that one?”
I’ve been married to this man for over 30 years so you might not think Obergefell v. Hodges will have much of an affect on me personally, but as a tax professional, it does. Here’s a little history of how legislation and the Supreme Court decisions have affected taxes over the past 11 years.
Massachusetts legalized same sex marriage back in 2004. That was the beginning of the crazy tax returns. You see, while you could be legally married in Massachusetts, the federal government didn’t recognize the marriage. So, you had to file as married on your state return and single on your federal. As a tax preparer, you had to prepare three tax returns instead of one. Back in those days I was an instructor for H&R Block. I remember teaching how to prepare that return in one of my classes. It was pretty crazy and very complicated. Living and working in Missouri, I didn’t see many Massachusetts returns, but we still have to know how to do them.
More states adopted gay marriage, but it was still illegal in Missouri. Couples were getting married in Iowa and living in Missouri, but they still couldn’t legally file jointly here in Missouri. Some of my business colleagues and I worked on a tax strategy to help couples who were “married for all intents and purposes but just not legally recognized in the state”. It was a good tax plan while it lasted, and for some couples it was actually better tax-wise than married filing jointly. But of course it didn’t solve the issues of Social Security, healthcare, or pension benefits.
In 2012, the First Circuit Court of Appeals ruled that the Defense of Marriage Act (DOMA) was unconstitutional. This issue was headed to the Supreme Court, but hadn’t been settled yet. Which was another tax headache. You see, if the Supreme Court ruled that DOMA was unconstitutional, it would affect tax returns, but you can’t change your tax return based on the first circuit court of appeals. But–there’s a three year limit to amend a return for a refund. So, if you didn’t want to miss out on a potential refund for 2009, you had to file something called a “protective claim for refund.”
That meant, you were filing an amended return based upon something that hadn’t happened yet, hoping it would. The IRS would just stick those returns in a drawer until (or if) the issue ever came up. You had to write: “Protective claim for refund contingent upon the US Supreme Court decision on the First Circuit Court of Appeals case regarding the Defense of Marriage Act, Gill v. OPM.” If you didn’t work it just right, the IRS could just reject your claim.
In June of 2013, the Supreme Court held in United States v. Windsor that the federal government was required to recognized same sex marriages.(I know, I know, what happened to Gill? Windsor was heard first so that became the landmark decision and the Gill petition was turned down in light of the Windsor ruling. Your Amended return claiming Gill would still be good because of Windsor though.) This meant that if a couple were legally married in Iowa, for example, that they would not only be allowed to file a state return as married filing jointly, but they could also file their federal tax return as married filing jointly.
The Windsor case had a lot of consequences for preparers. In places like Massachusets where same sex marriage was legal, then the couple could just file as married filing jointly for both the state and federal returns. But in other states where same sex marriage wasn’t allowed, it was wait and see status while the legislatures battled it out. Here in Missouri, if you can file as married on your federal return, you filed as married on the state return. Next door, in Kansas, you filed as married on your federal return, and single on your state return. Those of us who prepare multiple state returns had to keep up on all of that. It was a headache keeping track of the state rules. Basically, in 2013, we had a flip flop of the tax rules–instead of filing a joint state return and separate federal returns like we did with Massachusetts in 2004, we were now preparing joint federal returns and separate state returns.
So now, with Obergefell v. Hodges I’m back to filing normal returns for everybody in every state. I get to ask normal questions like, “Are you single or married?” And I don’t have to ask, “Are you gay or are you straight?” Because quite frankly, whether you’re gay or straight should have absolutely nothing to do with your tax return.
First the Supreme Court overturned DOMA. Now the IRS has announced that no matter what state you live in, if you are married and gay, you should file as married filing jointly on your federal income tax return. Now the big question for everyone is: Should you amend your old tax returns?
The answer, in my best professional opinion, is MAYBE. If you read my blog posts very often, you saw that one coming didn’t you?
For some couples, filing jointly is going to help them out and get them a refund. If you’re a couple that’s entitled to a refund—AMEND! For some couples, filing jointly is going to have them paying more in taxes. To those couples I say—DON’T AMEND. You really do have a choice here because you filed your original return using the law of the land at the time of the filing. You are not required to amend your return because DOMA was overturned. You are allowed to amend your return. There’s a big difference.
An accountant friend of mine in Iowa has been working with some of his gay married clients and he’s finding that about 75% of his clients would lose money or stay close to the same amending their returns. Only about 25% of them would profit from it.
So how do you tell which category you fit into? Generally, a couple with a big difference is incomes—for example, one spouse stays home to care for the household while the other is the primary breadwinner—that couple is more likely to benefit from filing jointly. On the other hand, a couple where both spouses work and their incomes are close together could find themselves kicked into a higher tax bracket. They could really lose out filing together. Tax returns for families with children can go either way. I’m an accountant geek, so I say just run the numbers.
It makes a lot of sense to run the numbers because the new tax ruling is going to affect all of your future tax returns as well. If filing jointly is not to your advantage, it’s better to learn that now so you can adjust your withholding. Here’s a link to my Tax Tips for Newlyweds: http://robergtaxsolutions.com/?s=tax+tips+for+newlyweds. You may have been married for a couple of years, but never gotten to file a federal return as being married before so you might not have needed these tips before.
One more thing—if you’re in a state that doesn’t recognize gay marriage, you still might not be able to file a joint state return. Couples in gay marriage states have been dealing with the opposite problem for a few years now. They file joint state returns but then file a separate federal return. I suspect we’ll be seeing a lot of separate state returns for awhile. It’s going to take some time for lawmakers to make up their minds on that.
So, do you wait to see how your state legislature is going to handle the issue before amending? I say no. Go ahead and file your federal amendments. If the state changes, you can fix those later. I worry about people waiting too long and then missing out on their refund because they didn’t file the amended return on time. Unless the IRS grants some type of special extension, you only have until April 15th of 2015 to amend your 2010 income tax return.
If you need help determining if you should file an amended return or not, please contact our office. We can help you figure out if it’s worth your while or not.
The First Circuit Court of Appeals ruled that the Defense of Marriage Act (known as DOMA) is unconstitutional. This issue certainly isn’t settled and is going to go to the Supreme Court. The Supreme Court may or may not agree, but one thing I know is that it’s going to take some time. That’s why, if DOMA affects your taxes, you might need to act now.
If you are a gay married couple, you haven’t been allowed to file a joint federal tax return because of DOMA. If DOMA is overturned—then you can. And, if DOMA is overturned—you can go back and amend old tax returns as far as three years. You can amend a tax return from 2009 up until April 15, 2013. After that, any refund you might qualify for is lost.
Here’s the catch—the Supreme Court might not hear the case for at least another year so you’d lose out on some of your refund money just because of timing. But there’s a way to protect your interests now so that if the Supreme Court rules your way, you won’t lose out because of the timeline.
Sorry, but I’m going to get really tax geeky here. If this applies to you, you might want a tax professional’s help. Bottom line—if you would have benefitted tax wise from filing your return as “married filing jointly” then stick with me, it’s important.
You want to file amended tax returns for the tax years you were married with a “protective claim for refund”. Basically, a protective claim for refund means that your right to the refund is contingent on future events. In this case, you won’t have the right to claim your tax refund until the Supreme Court issues a decision on DOMA. For your 2009 tax return, your right to claim that refund could expire before the Supreme Court makes its decision.
Basically, a protective claim is going to preserve your right to claim your refund even if the tax deadline has expired. So if the Supreme Court makes its ruling after April 15, 2013–if you’ve filed a protective claim then you still have a right to your refund even though the statute of limitations for that refund has expired.
When you file your 1040x, you’re going to want to say in the explanation box that you are filing a “Protective claim for refund, contingent upon the US Supreme Court decision on the First Circuit Court of Appeals case regarding the Defense of Marriage Act, Gill v OPM.”
Generally, the IRS won’t do anything on your protective claim until the contingency is resolved—in this case, when the Supreme Court actually makes its ruling.
You will mail your 1040X with the protective claim for refund to the same address that you mail a normal 1040X. It varies depending upon the state you live in, but it will be in the form instructions.
Definitely use certified mail, return receipt requested when you send your amendment in. That’s your back up that you filed.
There aren’t that many people who will qualify to file these protective claims for refund returns. I’m in Missouri, we don’t recognize gay marriage. Illinois, next door just recognized it last year so there wouldn’t be any 2009 tax returns for gay couples. And for some couples, filing jointly doesn’t really reduce their tax burden anyway so it won’t make a difference. But if this could help you, then you need to know about it.
If you’d like to read the full case Gill v OPM, here’s a link: http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2204P.01A
One of the points it specifically references is federal income tax returns.