Some recent high-profile U.S. Supreme Court decisions have clarified the tax situations for many clients of financial advisors.
“The 3.8% net investment income tax and the 0.9% additional Medicare tax on earned income are here to stay,” says Amy M. Gordon, a partner at McDermott Will & Emery LLP in Chicago. She notes these levies would have remained in the tax code even had the justices, in King v. Burwell, struck down federal tax credits for purchasing health insurance through an exchange created under the Patient Protection and Affordable Care Act. That’s because the taxes were not specifically earmarked to offset the tax credits; rather, their purpose is to offset the costs of the act in general.
Elsewhere, the court’s 5-4 landmark decision permitting same-sex marriage in Obergefell v. Hodges has significant implications. “All same-sex couples are affected, some more than others,” observes Stuart H. Armstrong II, a financial planner with Centinel Financial Group in Needham Heights, Mass.
Same-sex couples are immediately impacted in what had been tagged as “non-recognition states,” or the states that did not acknowledge same-sex marriage until the Obergefell case. These clients may be able to get a refund of past state income taxes paid. Until now, they have had to file as single taxpayers for state purposes, even though since 2013 federal law has required them to file as married. Now their state status is married, too.
“When a state first recognizes same-sex marriage, it typically permits affected taxpayers to amend their filing status from single to married for tax returns that are still open, which is usually the last three or four returns,” says Rocky Mengle, senior state tax analyst at Wolters Kluwer Tax & Accounting in Riverwoods, Ill. “Since the Supreme Court’s decision in Obergefell, the guidance we’ve seen from Kentucky, Louisiana, Michigan and Ohio allows, but does not require, married same-sex couples in those states to file amended returns.”
Translation: Same-sex couples in these states should amend their state income tax returns if doing so would produce a refund, but not if it would increase their tax liability.
Affected clients in other states should wait to file amended returns until their state has provided guidance, unless an open year is about to close because of the statute of limitations expiring, advises Janis Cowhey, a partner and co-leader of the Modern Family and LGBT Services Practice Group at the accounting firm Marcum LLP in New York City.
In the future, tax compliance will be simpler for same-sex couples. In the non-recognition states, in order to file as singles at the state level, couples had to trace deductions to the partner who actually paid the expense—a painful record-keeping exercise. But now with the ability to jointly file state returns, the need to trace disappears. “They can look at their deductions as a household unit,” Cowhey says.
As for wealth-transfer taxes, gay spouses of people who have passed away in Kentucky, Tennessee and Nebraska may be able to recoup the state estate and inheritance taxes they have paid if they amend their returns. To take advantage of this, Cowhey says the clients had to be married when their spouses passed away and, as a general rule, they must have paid the state estate or inheritance taxes within the last three years.
Nationwide, the estate planning documents of same-sex couples can probably benefit from review and, perhaps, modification. “Maybe they contain some qualifying language in case the client was in a state that didn’t recognize their marriage,” Cowhey says. Whatever the situation, she adds, documents should be updated so they are appropriate for the new environment.
Supreme Court Rulings’ Impact On Tax Planning
August 2015
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