Over the past two years, two landmark U.S. Supreme Court rulings involving same-sex marriage—Windsor and Obergefell—have changed the legal landscape for millions of Americans. These long-anticipated rulings have given same-sex couples the right to marry and have their marriage recognized in every state. With these rulings comes equal tax treatment, the implications of which are finally becoming clearer for tax and accounting professionals.
Since the Windsor decision, all same-sex couples legally married under state law must file as married – either filing jointly or separate – for federal income tax purposes, starting with the 2013 tax year. At that time, same-sex couples could file as married only in states that recognized marriage for same-sex individuals for state income tax purposes. This resulted in significant complexity for accountants, given the need to prepare separate federal income tax returns to reconcile items between a jointly filed federal return and two single filed state returns.
Earlier this year, the Obergefell decision changed all this by allowing consistent filing status between federal and state income tax returns for same-sex couples legally married under state law, regardless of their state of residence.
With these momentous changes now in effect, accountants must make sure they are utilizing software that is updated to reflect recent legislation and case law and that offers specific data entry procedures for numerous client scenarios. This allows you to provide valuable advice to same-sex couples and process their returns in an accurate and timely manner, and minimize the couples’ tax burden.
Practitioners supporting married same-sex couples who were previously not allowed to file federal or state income tax returns as married individuals should evaluate whether it is advantageous to file amended returns for prior years. It is important to be aware, however, that filing an amended return from single to joint status may not result in less overall federal and/or state income taxes. Due to progressive tax rates and stacking income, a joint return may result in tax that is greater than the sum of the two single returns for a married couple, which we know as the “marriage penalty.”
To address this, practitioners should look for software with the ability to model filing status options through client replication, filing status optimization utilities, and tax projection worksheets. In addition, the software should offer seamless transitions for couples that changed their filing status and need to have their data merged in to one client.