Tax briefing on marriage filing status and same‑sex couples after Supreme Court decision

Ti v4 Expert Analysis income and have similar tax deductions (at least in amount) have generally been better off from a tax standpoint filing as However, that assessment tilts in favor of marriage and unmarried individuals. filing a joint return if one partner earns or deducts the greater portion of any oth- erwise combined amounts. COMMENT. Although much press was given to “marriage penalty relief” when the Bush-era tax cuts were permanently extended by the American Taxpayer Relief Act of 2012 (ATRA), such relief in fact only related to equality within the stan- dard deduction amount and the top por- tion of the 15 percent income tax bracket. Other “marriage penalties” continue to exist within the tax law depending upon circumstances, For example, the 33 per- cent tax bracket for joint filers in 2013 starts at $223,050 taxable income, while the 33 percent bracket for single taxpayers starts at $183,250. If there were no mar- riage penalty imposed on higher-income individuals earning similar amounts, the 33 percent bracket for joint filers would not start until reaching the $366,500 level, or double that set under the Internal Revenue Code for single filers. Married Filing Separately. \f same-sex married couples post-Windsor want to keep their finances (and liabilities) separate for the purpose of filing separate returns, they will generally—but not always—pay more federal income tax. The rate brackets for “married filing separately” are higher than “unmarried, not surviving spouse or head of household.” Innocent Spouse Status. Married taxpayers who file joint returns are jointly and severally responsible for the tax and any interest or pen- alty due on the joint return. In some cases, a spouse will be relieved of this shared liability for tax owed on a joint tax return. Three types of relief are available: general innocent spouse re- lief; separate liability relief; and equitable relief. IMPACT. Because of the Supreme Courts decision, the three types of in- nocent spouse relief are now presumably available to same-sex married couples. CCH Tax Briefing Same-sex married partners cannot turn a blind eye to any item that is listed on a joint return. A decision to file joint returns retroactively for prior tax years as the result of the Supreme Court’ de- cision, therefore, should include consid- eration of the joint and several liability that would be triggered. Separate return status would eliminate the issue of joint liability entirely. The IRS is expected to issue guidance in this area. Surviving Spouse Claims. A surviving spouse computes tax using the same rate brackets as married couples filing joint re- turns. Rules for surviving spouse status for same-sex married couples now presumably follow the same rules as for opposite-sex couples. If a taxpayer is a surviving spouse, the year the spouse died is the last year for which the taxpayer can file a joint return with that spouse. A taxpayer can also qual- ify as surviving spouse for two tax years fol- lowing the year in which his or her spouse dies if the taxpayer maintains a household for certain dependents (a child, adopted child, foster child, or stepchild), has not remarried, and filed or could have filed a joint return with the spouse for the year in which his or her spouse died. FILING STATUS, AGI FLOORS AND THRESHOLD AMOUNTS The amounts of income and deductions reported on a return are used by the IRS in determining whether certain thresh- old levels and floors are reached. Those amounts in turn determine access to a va- riety of tax benefits. Some of these floors or threshold amounts are applied to all filing statuses uniformly; others vary de- pending upon filing status. IMPACT. Depending upon adjusted gross income (AGI) and other levels reported on a return, combining the income and deductions of each same-sex partner un- der a single joint return may or may not work to the advantage of the couple as a unit, in contrast to filing as unmarried or married filing separately. Floors. Tax benefits dependent upon floor levels of adjusted gross income (AGI) or modified AGI (MAGI) set forth under the Internal Revenue Code include the following itemized deduction categories, among others: m Medical expense deduction floor (10 percent AGI (temporarily at 7.5 percent for taxpayers over age 65)); m Casualty loss deduction floor (10 per- cent AGI); and m Miscellaneous items deduction floor (2 percent AGI). COMMENT. J» the case of married in- dividuals who file separate returns, if one spouse itemizes deductions on his or her return, the other spouse must also do so ir- respective of whether his or her standard deduction would be larger. This rule does not apply to unmarried couples who file separate returns. Ceilings. Use of excess capital losses to off- set ordinary income is generally limited to $3,000 per return, whether on a joint return or an unmarried single return. Taxpayers who are married filing separately, however, are allowed only a $1,500 maximum capital loss deduction; the balance in all cases may be carried forward into the next tax year. Thresholds. For some taxpayers, AGI] above designated thresholds reduces certain tax benefits. A reduction in itemized deduc- tions and a reduction in personal exemp- tions are the most common among higher- income individuals. For example: us ltemized deductions otherwise allowed must be reduced by the lesser of (1) three percent of AGI that exceeded a threshold amount (see chart, below) adjusted annually for inflation, or (2) 80 percent of the total amount of oth- erwise allowable itemized deductions. No re- duction is required in the case of deductions for medical expenses, investment interest, and casualty, theft or wagering losses. a Personal exemptions, likewise, are required to be reduced where AGI exceeds a specified threshold amount: by two percent for each $2,500 (or fraction thereof) by which AGI ©2013 CCH Incorporated. All Rights Reserved. HOUSE_OVERSIGHT_029308