IRS Clarifies Federal Tax Regulations for Same-sex Spouses
Proposed regulations would update prior IRS guidance to reflect that same-sex couples can now marry in all states and that all states must recognize these marriages. Individuals in domestic partnerships, civil unions or similar relationships are not treated as married under federal law.
On Oct. 21, 2015, the U.S. Department of Treasury and the Internal Revenue Service (IRS) released proposed regulations implementing the Supreme Court’s same-sex marriage decisions for federal tax purposes. The proposed regulations were issued to confirm that federal tax code provisions relating to marriage should be interpreted to include same-sex spouses as well as opposite-sex spouses. The proposed regulations would apply to all federal tax provisions where marriage is a factor, including:
- Filing status
- Claiming personal and dependency exemptions
- Taking the standard deduction
- Employee benefits
- Contributing to an IRA
- Claiming the earned income tax credit or child tax credit
However, the proposed regulations would not treat registered domestic partnerships, civil unions or similar relationships not designated as marriage under state law as marriage for federal tax purposes. While the proposed regulations do not contain new tax guidance for employers, they confirm the tax rules that apply to same-sex couples following the Supreme Court’s decisions on same-sex marriage.
On June 26, 2013, the Supreme Court held in United States v. Windsor that Section 3 of the Defense of Marriage Act (DOMA)—which generally prohibited the federal government from recognizing the marriages of same-sex couples—was unconstitutional. However, the Supreme Court’s DOMA ruling did not require states to allow same-sex couples to marry or to recognize same-sex marriages performed in other states.
As a result of the Supreme Court’s DOMA ruling, legally married same-sex couples became entitled to the same benefits and protections under federal law as opposite-sex married couples. The IRS issued tax guidance following the DOMA ruling, such as Revenue Ruling 2013-17, in order to clarify the ruling’s impact on tax code provisions that refer to marital status.
On June 26, 2015, the Supreme Court ruled in Obergefell v. Hodges that same-sex couples have the right to be married in their own states and to have their marriages recognized as valid in every other state.
The proposed regulations were issued to strengthen and clarify prior IRS guidance (such as Revenue Ruling 2013-17) to reflect that same-sex couples can now marry in all states and that all states must recognize these marriages.
The proposed regulations would amend current IRS regulations to clarify that terms indicating sex, such as “husband” and “wife,” should be interpreted in a neutral way to include same-sex spouses as well as opposite-sex spouses.
In addition, the proposed regulations provide that a marriage of two individuals will be recognized for federal tax purposes if that marriage would be recognized by any state, possession or territory of the United States. Under this rule, whether a marriage conducted in a foreign jurisdiction will be recognized for federal tax purposes depends on whether that marriage would be recognized in at least one state, possession or territory of the United States.
Domestic Partnerships and Civil Unions
For federal tax purposes, the term ‘‘marriage’’ does not include registered domestic partnerships, civil unions or other similar relationships recognized under state law that are not designated as a marriage under that state’s law. Thus, for federal tax purposes, the terms ‘‘spouse,’’ ‘‘husband and wife,’’ ‘‘husband’’ and ‘‘wife’’ do not include individuals who have entered into domestic partnerships, civil unions or other similar relationships.
The proposed regulations note that some couples have chosen to enter into civil unions or domestic partnerships to avoid certain consequences of marriage (such as increased taxes or the loss of Social Security benefits) and treating these couples as married would undermine their expectations regarding the scope of their relationships.
Implications for Employers
The proposed regulations confirm for employers that employees in same-sex marriages should be treated the same as employees in opposite-sex marriages for purposes of federal tax laws.
The proposed regulations will become effective when they are published in final form. Until then, employers may continue to rely on the guidance the IRS issued following the Supreme Court’s DOMA ruling, including Revenue Ruling 2013-17. Under this guidance, for example:
- An employer should not impute additional income to an employee who covers his or her same-sex spouse as a dependent under the employer’s health plan
- An eligible employee may pay for a same-sex spouse’s health coverage on a pre-tax basis through a cafeteria (or section 125) plan in the same way as an employee with an opposite-sex spouse; and
- An eligible employee may receive tax-free reimbursements for expenses of his or her same-sex spouse through a health flexible spending account (FSA), health reimbursement account (HRA) or health savings account (HSA).