Tax Planning for Same-Sex Couples

In the “be careful what you ask for” realm, many gay and lesbian couples around the country may be kicking themselves for their efforts to win the right to file a joint tax return with their partner.

More and more couples are discovering what a mess it can be when the federal government and the states have starkly different rules. Here’s help to guide you through the nuances of filing as a couple — and finding the method that offers you the best tax advantages.

Federal income tax return. Starting with 2013 returns due April 15, 2014, same-sex couples who were legally married in any jurisdiction that allows such unions must file their federal income tax return as a married couple. That means choosing either the married filing jointly or the married filing separately status. (If you were legally married in 2010 through 2012, you may — but you don’t have to — file an amended return to choose married filing jointly status.) This rule applies regardless of whether the state you live in allows same-sex marriage.

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State income tax return. Seventeen states and the District of Columbia now allow same-sex marriages. In the states in this group that have an income tax, married gay and lesbian couples can file joint tax returns. Four states recognize same-sex civil unions or domestic partnerships, and qualifying couples in those states can also file joint tax returns. See our special tax map for details on how your state treats married gay and lesbian couples when it comes to filing tax returns.

When federal and state rules collide. What if the federal government demands that you file as a married couple but your state demands that you file as a single individual? That can cause real problems because most states that have income taxes use the federal return as a starting point. If you use married filing jointly for your federal return but are not considered married for state purposes, how do you complete a state return?

The states have come up with several different ways to handle this issue. A review of state rules by the Tax Foundation, a Washington, D.C., research group, found the following approaches:

Five states — Arizona, Kansas, North Dakota, Ohio and Wisconsin — require taxpayers to allocate income from the joint federal return to two single returns using a state-developed schedule.

Thirteen states — Georgia, Idaho, Indiana, Kentucky, Louisiana, Michigan, Montana, Nebraska, North Carolina, Oklahoma, South Carolina, Virginia and West Virginia — require taxpayers to prepare “dummy” federal returns based on each person’s income for purposes of transferring information to the state return.

Alabama requires same-sex couples who file joint federal returns to divide their federal tax liability — for state tax return purposes — according to the ratio of each individual’s adjusted gross income to the couple’s combined federal AGI.

Four states — Colorado, Missouri, Oregon and Utah — allow same-sex married couples to file joint returns even though these states do not allow gay and lesbian marriages. (All but Utah require the couples to file as married; in Utah, it’s up to the taxpayers whether to file as married or single.)

Three states with an income tax not coupled to the federal return — Arkansas, Mississippi and Pennsylvania — do not allow same-sex married couples to file a joint return.

Further complications arise in states that permit registered domestic partners to file joint returns, because the federal government’s new rules for same-sex couples apply only to married couples. In California, for example, registered domestic partners — either same-sex couples who are18 or older or heterosexual couples in which at least one partner is at least 62 — are permitted to file joint state income tax returns. But the federal government does not recognize such partnerships and therefore forbids a joint federal return.

So domestic partners who file jointly in California must complete a total of four tax returns. First, each partner must complete an individual federal Form 1040 (or 1040-A or 1040-EZ) to file with the IRS. Then, the couple must create a mock, or dummy, joint federal return combining income, adjustments, deductions and credits. Finally, they use that fantasy return as the jumping-off point to prepare a joint California tax return.

Wherever you live, it’s important to make sure you have the latest information on your tax-filing status. This is an area where the laws are changing quickly. Check back with Kiplinger's Same-Sex Filing Status Map for the up-to-date situation.

Finally, at the federal level, most married couples pay less tax by choosing to file jointly rather than separately. At the state level, however, filing separately often pays off in a lower tax bill for a married couple. So you'll probably want to tackle another extra tax form: the equivalent of married filing separately. It might save you money. Fortunately, if you use tax software, it shouldn't be too onerous.