Love, marriage … then taxes

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Recently married same-sex couples, or those considering taking the plunge, will have a lot more questions for their tax attorney this season. Sweeping changes in Minnesota and federal law have resulted in new options for same-sex couples when they file their taxes.

It started in May when the state legislature passed a bill to make Minnesota the 12th state to recognize same-sex marriage. Then in July, the U.S. Supreme Court found the Defense of Marriage Act unconstitutional because it denied federal benefits to gay couples who are legally married. That decision paved the way for same-sex couples married in states that recognize their union to have both state and federal benefits. Chief among them, gay and lesbian married couples can file joint state and federal tax returns.

Then in September, the Internal Revenue Service announced that same-sex marriages will be recognized for the purposes of federal taxes, regardless of where the couple lives. So a same -sex couple that was married in another state but living in Minnesota can now file jointly.

The IRS also pledged that it will allow married couples to file amended returns for previous years in which they overpaid taxes because the federal government didn’t recognize their marriages. It also clarified that employer-paid health insurance premiums for same-sex spouses or flexible spending accounts should be treated the same as for opposite-sex couples. This money is a benefit, and not taxable wage. Couples who were married in another state and paid premiums for a spouse on an after-tax basis in a past year, can get a refund on that money.

Filing gets further complicated if one spouse works in Minnesota but the couple lives in Wisconsin, the Dakotas or another state that doesn’t recognize same sex marriage. That couple will file jointly for the Minnesota income, but separate for the income earned in the other state.

The implications of these developments will be significant. Some attorneys are even advising their clients to wait a few years to get married until the changes are fully understood and implemented.

The Minnesota Department of Revenue created a page on its website to outline the income tax withholding details. But many same-sex married couples are still going to be asking: “What should we do?”

There is no easy answer. The circumstances of each couple are different, said Mary Kate Kelley-Scheidler, a tax attorney at Martin & Wagner in Rogers.

“There could be situations where it is beneficial to file separately; you wouldn’t have some of the penalties associated with filing as a married couple. But it also makes it easier to put everything on one return, especially with children,” she said. “I hate to give you the lawyer’s answer, but it depends.”

Kelley-Scheidler said she will be hesitant to try anything “too creative” for the next few years because following any major tax change is an inevitable uptick in IRS audits.

“The main thing is we can treat everyone the same. I don’t have to do two returns, or split the mortgage interest or file the state return jointly and the federal return separate. Married is married. That will help tremendously.”

Local tax preparers and attorneys panned one of the recent IRS announcements.

Same-sex couples who were married and living in Minnesota can now file amended returns for taxes they paid on health insurance premiums that they didn’t need to. They can also have the premiums from previous years excluded from their taxes.

It’s not known how much money the refunds will cost the state. But many preparers and tax attorneys say it won’t be worth it for newly married couples to find out. There is no penalty for not filing an amended return.

“In the vast majority of scenarios, you are going to end up paying more money if you file an amended return, said Roger Menden, a tax preparer in Shakopee. “ I know why the IRS did this, to extend some good will. But even if you end up with $100 refund it’s going to cost you a lot more than that to file [the amended return.]”

Many same-sex couples will find out that they will pay more in taxes once they get married, said Lee Roehl, a partner at ROR Tax Professionals in St. Louis Park. But the benefits of having a recognized marriage outweigh the increased tax bill.

“It boils down to what’s important in life? Your income tax will be affected, but it’s not the primary issue in your life” he said.

Married couples can make joint decisions on health care, estate taxes, insurance and even how to pay for a nursing home should one spouse need it. Both spouses can claim the mortgage interest or rental credit and there will be tax benefits for single income families.

“I am telling my clients to wait until 2014 to get married. Let the smoke clear on some of this stuff. We will have much better handle on the issues by then,” Roehl said. “If it is a straight couple, you wouldn’t even consider these issues before getting married. But for gay and lesbian couples, a lot of them have been together for 20 or 30 years. They have a much longer financial history.”