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Final Regulations on Same-Sex Marriage

IT’S OFFICIAL: TAX REGULATIONS MODIFIED TO RECOGNIZE TO SAME-SEX COUPLES

The IRS has issued final regulations that broaden definitions to include couples as married couples for all federal tax purposes if a couple is legally-married under any state’s laws. It took the IRS a little over a year after the landmark Supreme Court decision in June 2015 legalizing gay marriage across the nation to put its rules in place to conform with the judicial mandate.

History of IRS Action

Since 1996, when the Defense of Marriage Act (DOMA) became law, the IRS has been caught up in the uncertainty of how to treat same-sex couples for tax purposes. The DOMA mandated that same-sex unions not be recognized by federal agencies at the same time that some states were beginning to allow domestic partnerships, civil unions, and marriage for same-sex couples.

Fast forward to 2013, when the U.S. Supreme Court, in U.S. v. Windsor, found that Section 3 of DOMA was an unconstitutional deprivation of equal protection. That section barred same-sex married couples from being recognized as “spouses” for purposes of federal laws. The effect of the case was to force the federal government to recognize state-sanctioned same-sex marriages. In short, if a state allowed same-sex marriage and the couple was legally married under state law, the federal government had to recognize the marriage. The IRS then issued Revenue Ruling 2013-17 stating that if a same-sex couple was legally married in a domestic or foreign jurisdiction, their marriage would be recognized for federal tax purposes, regardless of where they currently lived.

The Supreme Court did not stop there and, in 2015, issued another opinion that struck down all state bans on same-sex marriage. In Obergefell v. Hodges, the Court said that the Fourteenth Amendment requires all States to license a marriage between two people of the same sex. The effect was to nullify DOMA and require federal agencies to give same-sex couples parity for all purposes, including federal benefits and federal tax treatment. The new regulations issued by the IRS do just that, but it is not quite as easy as you may think. Let’s explain.

New Regulations

The same-sex marriage rules were first proposed in 2015 and have gone through a period of public comment and revision before being finalized. The effect of the regulations is pretty straightforward. They achieve parity between same-sex and heterosexual couples by simply defining the terms
“spouse,” “husband,” and “wife” that now exist in the tax laws as any individual lawfully married to another individual. The regulations also state that the term “husband and wife” means two individuals lawfully married to each other. Interestingly, the rules do not specifically refer to same-sex marriage or gender and also do not create new gender-neutral terms. Instead, the regulations adapt existing terms referring to married couples in the tax code as gender neutral.

Complication Related to Alternative Legal Relationships

The problem the IRS grappled with in writing the new rules involves the treatment of couples who enter into alternative legal relationships, such as domestic partnerships, civil unions, and other alternative arrangements. Now that there is full marriage, the regulations specifically state that these relationships are not considered a marriage under the tax rules.

The regulations set two requirements for a relationship to be recognized as a legal marriage, depending on whether the marriage is domestic or foreign:

  1. Domestic marriages are recognized by the IRS if the marriage is recognized by the state, possession, or territory of the U.S. in which the marriage is entered into, regardless of where the couple lives. In other words, the place of celebration is the point of reference for determining whether the couple is legally married.
  2. Foreign marriages will be recognized if the couple is legally married under the laws of a foreign jurisdiction and the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the U.S., regardless of where they live.

Conclusion

The final regulations officially clear the way for same-sex couples to file joint income tax returns or to file with the status of married filing separately. The new rules also apply to many other tax provisions, including:

• rules on qualified retirement plans,
• elections and reimbursements for spouses under cafeteria plans,
• flexible spending arrangements
• health savings accounts
• employment tax procedures
• estate tax rules
• alimony, child support and dependency exemptions.

The new regulations took effect on September 2, 2016.

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