A Congressional Research Service (CRS) Report has provided an overview of the potential federal income tax implications for same-sex married couples of the decision in U.S. v. Windsor, (Sup Ct 6/26/2013) 111 AFTR 2d 2013-2385, in which the U.S. Supreme Court struck down section 3 of the Defense of Marriage Act (DOMA). That DOMA provision had required same-sex spouses to be treated as unmarried for purposes of federal law. Same-sex couples whose marriages are recognized at the federal level as a result of Windsor will be required to change their tax filing status from that of an unmarried person to that of a married person, which may affect their marginal tax rates. In addition, those couples’ eligibility for a variety of tax credits, and the treatment of certain forms of their employee compensation, may also be affected.
Laws that are affected. The Government Accountability Office (GAO) estimated that there were 1,138 statutory provisions in the U.S. Code-including almost 200 Internal Revenue Code provisions-in which marital status was a factor in determining benefits. As a result of the Windsordecision, at least for those married same-sex couples residing in states that recognize their marriages, these statutory provisions will be applied in the same manner to married same-sex couples as they are to married opposite-sex couples. Thus, these married same-sex couples will have the same federal tax treatment as married opposite-sex couples.
Observation: The CRS Report cautions that it is currently unclear whether, under Windsor, this will be true for married same-sex couples who are residing in a state where the marriage is not recognized.
Filing status and tax brackets. As a result of Windsor, same-sex couples who are recognized as married under the Code will be required to file their taxes in the same manner as married opposite-sex couples-generally, either jointly or separately. This filing status change may increase some couples’ income tax liabilities (a “marriage penalty”), while other couples may get a benefit (a “marriage bonus”). Marriage tax penalties and bonuses occur because higher ranges of income are subject to higher tax rates. Tax brackets refer to the range of income subject to a particular tax rate. For example, for 2013, the first $17,850 of taxable income for all married joint filers is subject to a 10% tax rate (the 10% bracket). Taxable income above $17,850 but less than $72,500 is taxed at a 15% rate (the 15% bracket).
The CRS Report concluded that a marriage penalty is more likely among couples where both partners earn similar incomes, especially if their combined income were to push them above the 15% tax bracket. Couples with a greater disparity in earnings are more likely to experience a marriage bonus. For example, couples in which one spouse earns less than 5% (or none) of the family’s total income will experience a marriage bonus.
Illustration: The CRS Report illustrates how the distribution of a combined income of $200,000 between same-sex partners can result in a marriage bonus or penalty. Where each partner earns $100,000, they would experience a marriage tax penalty of $879. Where one partner earns $50,000 and the other $150,000, they would have a marriage tax bonus of $557.
Marriage penalties may be likely for same-sex couples with children for several reasons. Before the Windsordecision, married same-sex couples with children-because they couldn’t file as married-typically would have one partner file as a head of household, claiming the children as a dependents, and have the other partner file as single. After Windsor,couples who have children and whose marriage is federally recognized must file as married. Although allowed to file joint returns, they may find that they will be in a higher tax bracket than they were when they filed as head of household and single.
Income tax credits. The CRS Report notes that tax credits are generally structured so that the amount of the credit falls when income exceeds a certain threshold, ultimately phasing out to zero. In addition, the Windsor decision may also have other implications for same-sex couples claiming tax credits. The CRS Report discussed the following credits:
… Earned income tax credit (EITC). The value of the EITC is reduced for many low-income dual earner couples when they are married. Marriage penalties occur when the joint income of the married couple pushes them into the EITC phase-out range or results in the couple being ineligible for the credit.
… Child and dependent care credit. The amount of the child and dependent care credit is limited to no more than the income of the lower earning spouse. If one spouse has no income, the couple generally wouldn’t qualify for the credit.
… Child tax credit. The value of the child tax credit phases out as a taxpayer’s income rises above a certain income level. The phase-out threshold for married couples is less than twice that for unmarried individuals. As a result, two unmarried individuals might each qualify for the credit, but will receive a smaller credit or become ineligible for it if married.
… Education tax credits. The income levels at which taxpayers are ineligible for education tax credits tend to be twice as high for married couples as for singles. The ultimate value of the credit as a result of marriage will depend on the distribution of income among spouses. Marriage is unlikely to affect the overall credit amount among couples whose income is equally distributed between the two partners. However, among couples whose income is less evenly distributed, the value of their education credit will depend on the income level of the individuals who incur education expenses, and could increase or decrease as a result of marriage depending on the taxpayers’ particular circumstances.
… Adoption credit. The adoption credit is generally not allowed when adopting a spouse’s child. This may mean that some same-sex partners who might otherwise have been able to claim an adoption credit will no longer be able to do so.
Nontaxable employee compensation. The Windsordecision can affect whether contributions to dependent care flexible spending accounts (FSAs) are nontaxable. A married couple with children may generally exempt an annual maximum of $5,000 contributed to a dependent care FSA-the same maximum amount a single individual can put in such an account-while a married individuals filing separately is limited to $2,500. Any amount in excess of $5,000 is included in taxable income for the married couple.
Same-sex married couples who each have contributed to a dependent care FSA may find that part of their account becomes taxable now that they are treated as married under the Code. If each partner had a child and each was contributing to a dependent care FSA, they may have over-contributed in the first year in which they file as a married couple. In later years, they would continue to be limited to putting $5,000 in a dependent care FSA, but they could divide that amount between themselves.
The Windsordecision can also affect whether employer contributions for employer-provided health insurance plans are nontaxable. When an employee elects to purchase employer-provided health insurance, the employer generally pays for part of the premium, but this contribution to an individual or family plan generally isn’t considered taxable income to the employee. However, before Windsor,same-sex employees (unlike opposite-sex employees) who purchased an employer-sponsored family health plan were taxed on the estimated value of the employer’s contribution toward the premiums for the same-sex spouse. After Windsor, to the extent that same-sex marriage is recognized for federal tax purposes, the estimated value of the employer’s contribution to health insurance coverage for an employee’s same-sex spouse will be nontaxable, reducing tax liability.
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