Even in MA, CA, Marriage Equality Not Equal at Tax Time
Even when states such as Massachusetts and California offer their residents marriage equality, when it comes to federal taxes gay families are still separate--and unequal.
An article posted at BankRate.com explains that under the provisions of the 1996 federal Defense of Marriage Act (DOMA), the federal government and all of its offices, including the IRS, are obligated to treat only mixed-gender couples as married, even if same-sex families might have been married at the state level.
That is generally not a problem for most people, until it comes to tax issues. Not only are the annual federal income taxes impossible for gay marrieds to file jointly; other tax issues, such as capital gains taxes for the sale of a home, are also affected by DOMA.
Explained attorney Jo Ann Cintron, who works out of Boston, MA, and has worked with same-sex couples going through divorce, "If two people get married, the federal government is not interested in that until they try to take advantage of a preferential tax treatment that is granted on the basis of marital status."
Added Cintron, "Once they attempt to avail themselves of that, the federal government takes notice."
For mixed-gender marrieds, that can mean a tax break on the sale of a principle residence of $500,000, whereas gay marrieds can only take the tax break available to single people, an amount of only half that much. Though it is the case that if both own the property jointly each of them can take the $250,000 break under certain circumstances, that would not be true in other situations, such as when one partner is a stay-at-home spouse.
Capital gains taxes are also more complicated for gay marrieds who get a divorce, because under federal law, their marriage was never recognized in the first place. Any property awarded to one ex-spouse from the holdings of the other can mean a federal tax bill is on the way.
Even at a state level divorce can be a messier business for gay families if they were married in one state but then lived in a state that does not offer marriage equality when they decided to divorce; because state laws then would not be set up to accommodate divorcing same-sex couples, a lawsuit might be necessary for one spouse to claim property or other support from the other, the article said.
According to tax analyst John Roth, "The only way that they could possibly divide the property, if, say, they bought a piece of real estate jointly, would be for one partner to go into court and ask for a partition suit to break the ownership and force the other partner to buy them out."
Added Roth, "But if that were the case, capital gains tax would incur" since DOMA does not allow the IRS to view gay divorce as the end of a marriage between individuals of the same gender.
Even before divorce or the sale of a home, gay families face different tax treatment when it comes to ownership of their first home. The tax credit that benefits first-time home buyers can be shared by married heterosexual to the tune of $7,500; not so for gay marrieds, however, who still could, in theory, claim a $3,750 tax credit, as could unmarried straight couples.
In that case, the government’s refusal to acknowledge gay marrieds could actually benefit the couple, since straight marrieds cannot claim the $7,500 break if either one owned a home in the previous three-year period, whereas if one member of a gay couple had owned a home that recently, then the other could theoretically still claim the tax benefit.
However, there are strings attached; the article quotes Roth, who said, "People usually sell their house within five (years) to seven years, which is only about one-third to one-half of the way through the recapture period.
"The minute you sell that house, you are going to trigger full recapture of any credit that you claimed."
Taxes are always a fraught issue, with the potential for missteps and missed opportunities for breaks; for gay families, the BankRate.com article cautioned, that’s even more the case.
The solution? Get professional tax advice.
Said Roth, "A lot of these same-sex couples are going to have to go out and hire professional financial help."